Introduction to Cost

and Management
Accounting
 Learning Objectives:

explain
explainthe
therole
roleofofaccounting
accountingin
indecision
decisionmaking;
making;

identify
identifythe
therelationship
relationshipbetween
betweenaccounting
accountingand
andmanagement
management
process;
process;

differentiate
differentiateamong
amongcost
costaccounting,
accounting,management
managementaccounting
accounting
and
andfinancial
financialaccounting;
accounting;

distinguish
distinguishaccounting
accountingsystem
systemfrom
fromany
anyother
othersystem;
system;

distinguish
distinguish the
theposition
positionof
of management
management accounting
accountingin inan
anor-
or-
ganization;
ganization;

state
statethe
theuse
useof
ofmanagement
managementand andcost
costaccounting
accountingininservice
serviceand
and
not
notfor
forprofit
profitorganizations;
organizations;

communicate
communicate aacode codeof
ofconducts
conductsto
tomanagement
managementaccountants;
accountants;
1.1 Purpose of an accounting system
Accounting systems
 takeeconomic events and transactions that
have occurred
 process the data in those transactions into

information that is helpful to managers and

other users
Managers use accounting information
 to administer each of the activities or func-

tional areas for which they are responsible

and
 to coordinate those activities or functions

within the framework of the organization as a 3

 Management account-
ing.
It measures and reports financial and nonfinancial
information that helps managers make decisions to
fulfill the goals of an organization.
 Its focus is on reporting to external parties.

It measures and records business transactions.

It provides financial statements based on

generally accepted accounting principles.

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Major Differences Between
Financial & Managerial Accounting
Managerial Account- Financial Account-
ing ing
Communicate financial
Purpose Decision making
position to outsiders
Primary
Internal managers External users
Users
Focus/Em-
Future-oriented Past-oriented
phasis
Do not have to follow GAAP compliant;
Rules
GAAP; cost vs. benefit CPA audited
Ultra current to very Historical monthly,
Time Span long quarterly , annual re-
time horizons ports
Behavioral Designed to influence Indirect effects on
Issues employee behavior employee behavior
 Cost Accounting
Cost Accounting: concerned with cost determination and cost control
Cost accounting can be viewed as the intersection between financial and
management accounting

Cost accounting addresses the informational demands of both

financial and management accounting by providing product cost in-
formation to external parties and internal managers for planning,
controlling, decision making, and evaluating performance.
7
 It describes the activities of managers in
planning and control of costs.

It includes the continuous reduction of costs.

It is a key part of general management

strategies and their implementation.

1-8
1.2 Roles of management accountants

Scorekeeping
This involves accumulating data and
reporting reliable results to
all levels of management.
This role asks: How is the business doing?
(Evaluate Organizational Performance)
Example: recording of actual revenues and
purchases of newsprint paper
for Daily News Co. relative to budgeted amounts .
 This involves helping managers
properly focus their attention.
This role asks: Which opportunities and
problems should be emphasized first.
Attention directing should focus on all
opportunities to add value to an organization,
not just cost-reduction opportunities.

Examples: for Daily News Co.

•the number of unsold copies of the paper returned per day
•the daily utility costs of operating the printing presses.

1 - 10
 This involves comparative analysis
for decision making.
This role asks: Of the several alternatives
available, which is the best?
(Assess Possible Courses of Action)
Example: comparing the expected revenues and costs of pro-
posals from three different organizations to develop a new In-
ternet version of the Daily News

1 - 11
Different decisions place different emphases on these
three roles. For strategic decisions and planning deci-
sions, the problem-solving role is most prominent.

For control decisions the scorekeeping and attention di-

recting roles are most prominent because they provide
feedback to managers.

Feedback from scorekeeping and attention directing often

leads managers to revise planning decisions and sometimes
make new strategic decisions.
Accounting and the Management Process
Strategy Planning
Strategy – specifies how an organization
matches its own capabilities with the oppor-
tunities in the marketplace to accomplish its
objectives
Businesses follow one of two broad strategies
Cost Leadership Strategy
Product Differentiation Strategy
Strategic Cost Management – focuses specifi-
cally on the cost dimension within a firm’s
overall strategy
Accounting and the Management Process…
Management accounting helps answer impor-
tant Strategic questions such as:
Who are our most important customers, and
how do we deliver value to them?
What substitute products exist in the market-
place, and how do they differ from our own?
What is our critical capability?
Will we have enough cash to support our strat-
egy or will we need to seek additional sources?
 Accounting information helps managers
plan and control of the organization’s operations

Planning: Setting ob- Control: Implementing

jectives and outlining plans and using feed-
how the objectives back to evaluate the at-
will be obtained. tainment of objectives.
Management Process Internal Accounting System

Budgets,
Corrections and revisions of plans and actions

Budgets, Other information

Special
Special systems
Planning
Planning Reports
Reports Customer
Customer
Increase
Increase surveys
surveys
Profitability
Profitability Competitor
Accounting Competitor
Accounting analysis
analysis
System
System Advertising
Advertising
Control
Control impact
impact
––Actions
Actions Performance New
Performance New items
items
––Evaluations
Evaluations Reports
Reports report
report
 What is planning?

Setting Predicting Deciding how

goals results to attain goals

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 What is control?

Deciding Deciding on
and performance
taking evaluation
actions and feedback

1 - 18
 What are budgets?

They are They aid in the

quantitative coordination
expressions and
of a proposed implementation
plan of action. of the plan.

1 - 19
 What are performance reports?

Performance reports:
 compare actual results with budgeted amounts
 provide feedback by comparing results with plans
 highlight variances

Variances: deviations from plans

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 Boone Shop, July 2013
Budget Actual Va
Revenues $59,000 $60,000 $1,000 F
Cost of goods sold 42,000 43,400 1,400 U
Wages 6,700 7,000
General 1,300 900
Fixed costs 5,000 5,000 0
Operating income $ 4,000 $ 3,700 $ 300 U

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 Actual cost of goods sold were
72% of revenues instead of the budgeted 71%.
Budget %
Revenues $59,000 100 $60,000
Cost of goods sold 42,000 71 43,400
Gross margin $17,000 29

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This involves managers examining past perfor-
mance
and systematically exploring alternative ways to
make better informed decisions in the future.

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Cost-benefit Behavioral
balance implications

The system must provide

accurate, timely budgets and
performance reports in a form
useful to managers.

Weigh estimated
costs against Managers must use accounting
probable benefits. Reports.
people are involved in decisions,
not just dollars and cents
1.6. Management Accounting and Value
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
Value Chain is the sequence of business
functions in which customer usefulness is
added to products or services
Management Accounting and Value
The Value-Chain consists of:
1. Research & Development
2. Design
3. Production
4. Marketing
5. Distribution
6. Customer Service
The Value Chain Illustrated
A Value Chain Implementation
Supply
Supplychain
chain––describes
describes the
theflow
flowofof goods,
goods,
services,
services, and
andinformation
informationfrom
from cradle
cradleto tograve,
grave,
regardless
regardlessof
of whether
whether those
thoseactivities
activitiesoccur
occur in
in
the
thesame
sameorganization
organizationor or other
other organizations.
organizations.
Key Success Factors
The dimensions of performance that cus-
tomers expect, and that are key to the suc-
cess of a company include:
Cost and efficiency
Quality
Time
Innovation Quality
Quality––customers
customers
Cost
Cost––organizations
organizations are
areexpecting
expectinghigher
higher
are
areunder
undercontinuous
continuous levels
levelsof
ofquality.
quality.
pressure
pressureto
toreduce
reducecosts.
costs.
 Time
Time –– organizations
organizations are
are under
under pressure
pressure toto
complete
complete activities
activities faster
faster and
and to
to meet
meet
promised
promised delivery
delivery dates
dates more
more reliably.
reliably.

Innovation
Innovation –– there
there isis now
now heightened
heightened recognition
recognition
that
that aa continuing
continuing flow
flow of
of innovative
innovative products
products
or
or services
services isis aa prerequisite
prerequisite to
to the
the ongoing
ongoing
success
success of of most
most organizations.
organizations.

1 - 30
 Line managers: Staff managers: Advisory –
directly involved with Support line managers.
making and selling
products or services.

Cross-functional teams: Found in

modern, “flatter” organizations;
Functional areas work together
in decision-making process.
 Chief
Chief Financial
Financial Officer
Officer (CFO)
(CFO)

Controller
Controller Func-
Func- Treasurer
Treasurer Functions
Functions
tions
tions
Provision of capital
Planning for control
Planning for control Provision of capital
Investor relations
Reporting and interpreting
Reporting and interpreting Investor relations
Short-term financing
Evaluating and consulting
Evaluating and consulting Short-term financing
Banking and custody
Tax administration
Tax administration Banking and custody
Credits and collections
Government reporting
Government reporting Credits and collections
Investments
Protection of assets
Protection of assets Investments
Risk management
Economic appraisal
Economic appraisal Risk management
(insurance)
(insurance)
 Collects Prepares
and compiles standardized
information reports

Internal
Consultant

Interprets and Is Involved

Analyzes information in decision making

Management
The
TheInstitute
Instituteof
ofManagement
ManagementAccountants
Accountants(IMA)
(IMA)
Statement
Statementof ofEthical
EthicalProfessional
ProfessionalPractice
Practicefor
for
Management
ManagementAccounting
AccountingMembers
MembersRequires
Requiresmembers
members
to
toadhere
adhereto toaacode
codeofofconduct
conductregarding:
regarding:
••Competence,
Competence,
••Confidentiality,
Confidentiality,
••Integrity, and
Integrity, and
••Credibility.
Credibility.
Professional Ethics
The four standards of ethical conduct for
management accountants as advanced by the
Institute of Management Accountants:
Competence: Maintain an appropriate level of
professional competence
Confidentiality: avoid disclosing confidential
information except when authorized.
Integrity: Avoid conflicts of interest and sup-
porting any activity that would discredit the
profession.
Objectivity: Communicate information fairly
and objectively
Thank You for Your Attention!
Any Ques-
tions?