Cost accounting aims to assist managers in maximizing value for their organizations through efficient decision-making.
The value chain, which includes activities from R&D to customer service, transforms raw resources into goods and services. Efficient coordination with vendors, suppliers, distributors, and customers is essential.
Firms must decide where each value-added component can be performed most cost effectively.
Using Cost Information to Increase Value
Cost information adds value when it improves managerial decisions.
Cost accounting emphasizes understanding individual stages' contribution to value.
Accounting Systems
Accounting systems are classified as financial or cost (managerial) based on the primary users of information.
Financial accounting serves external decision-makers like investors and creditors, focusing on comparability across firms, governed by GAAP and IFRS.
Cost accounting serves internal managers, prioritizing relevance over comparability and focusing on future costs.
Cost Accounting, GAAP and IFRS
Financial data for external reporting adheres to GAAP or IFRS, while managerial cost data need not comply.
Management defines its own cost information, relevant for decision-making.
Customers of Cost Accounting
Customers are the focus; cost information is a product for managers at production, middle management, and executive levels.
Misuse of cost accounting information often arises from using data developed for external reporting for internal decision-making.
Framework for Assessing Cost Accounting Systems
Managerial decisions drive organizational performance, aided by accounting system information.
Accounting systems help owners evaluate organizational and managerial performance.
The Manager’s Job Is to Make Decisions
Managers are decision-makers relying on accounting systems for information.
The effectiveness of decisions depends on the quality of information provided by the accounting system.
Finding and Eliminating Activities That Don’t Add Value
Organizations identify and eliminate nonvalue-added activities to reduce costs.
Cost-benefit analysis is used to assess the worth of proposed changes.
Strategic opportunities are identified by eliminating nonvalue-added activities to gain a cost advantage or improve customer service.
Owners Use Cost Information to Evaluate Managers
Cost information informs owners about organizational and managerial performance.
Cost Data for Managerial Decisions
Estimating cost differences among alternatives is crucial, identifying cost drivers.
Cost accounting involves predicting future costs; past data helps predict future events.
Differential costs and revenues change based on actions.
Costs for Control and Evaluation
Responsibility centers have budgets to guide operations and meet goals.
Different decisions require different cost data.
Trends in Cost Accounting
Advances in IT and emphasis on cost control drive changes in cost accounting.
Cost accounting is integrated throughout the value chain, requiring collaboration between managers and cost accountants.
This includes R&D, design, purchasing, production (e.g., JIT methods), marketing (e.g., CRM), distribution (e.g., outsourcing), and customer service (e.g., COQ systems).
Enterprise Resource Planning
ERP systems link various organizational activities by integrating information.
Creating Value in the Organization
All managers use cost accounting information.
Choices: Ethical Issues for Accountants
Accountants face ethical dilemmas and must maintain integrity, objectivity, and confidentiality.
Professional codes of ethics exist, and the Sarbanes-Oxley Act of 2002 addresses corporate governance problems.
Cost Accounting and Other Business Disciplines
Cost accounting is interdisciplinary, overlapping with other business areas.
Introduction to Cost Accounting
Cost accounting systems provide information for informed managerial decisions and are tailored to specific company needs.
What Is a Cost?
A cost is a sacrifice of resources, including cash or assets, to acquire goods or services.
Cost is distinct from expense.
Outlay Costs vs. Opportunity Costs
Outlay Cost: A past, present, or future cash outflow.
Opportunity Cost: The forgone benefit from the best alternative use of a resource.
Operating profit is the excess of operating revenues over operating costs.
Presentation of Costs in Financial Statements
Cost information appears in financial statements for internal management use. Service, retail, wholesale, and manufacturing organizations differ in their statements.
Service Organizations
Labor costs are most significant.
Retail and Wholesale Companies
COGS tracks costs of tangible goods.
Manufacturing Companies
Manufacturing firms track various manufacturing costs.
Product Costs: Costs assigned to production units, recognized when sold.
Period Costs: Nonmanufacturing costs expensed as incurred.
Direct Manufacturing Costs: Product costs easily identified with units.
Indirect Manufacturing Costs: All other product costs.
Three major categories of product costs:
Direct Materials
Direct Labor
Manufacturing Overhead (factory burden)
Prime Costs are direct costs, including direct materials and labor.
Conversion Costs convert direct materials into final products (direct labor and manufacturing overhead).
Nonmanufacturing costs include marketing and administrative costs.
Cost Allocation
Cost allocation assigns costs from shared facilities or services to different departments or cost objects.
Cost Object: Any end to which a cost is assigned.
Cost Pool: Collection of costs to be assigned.
Cost Allocation Rule: Method for assigning costs.
Direct Cost: Easily related to a cost object.
Indirect Cost: Not easily related to a cost object.
Details of Manufacturing Cost Flows
Manufacturing involves steps like receiving materials, processing, and finishing goods.
Inventory accounts include Direct Materials Inventory, Work-in-Process Inventory, and Finished Goods Inventory.
Inventoriable Costs
Costs added to inventory accounts.
Costs flow through income and balance sheet accounts.
The cost of goods manufactured and sold statement presents manufacturing costs.
Cost of Goods Manufactured and Sold
Direct Materials: Beginning + Purchases - Ending
Work in Process: Beginning + Direct Materials + Direct Labor + Manufacturing Overhead - Ending