Cost Accounting:Information for Decision Making

Chapter 1

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Value Chain

– Value added activities– Non value added activities

• The Value Chain describes a set of activities thattransforms raw materials and resources into thegoods and services end users purchase and consume.

L.O. 1 Describe the way managers use accountinginformation to create value in organizations.

1 - 2

The Value Chain Components

Production

LO1

1 - 3

Accounting Systems

Financialaccounting

Financialposition and

income

Reports

Costaccounting

Informationabout costs

Reports

L.O. 2 Distinguish between the uses and users of costaccounting and financial accounting information.

1 - 4

Managerial Decisions

• Individuals make decisions.

• Decisions determine the performanceof the organization.

• Managers use information from the accountingsystem to make decisions.

• Owners evaluate organizational and managerialperformance with accounting information.

L.O. 3 Explain how cost accounting information is usedfor decision making and performance evaluationin organizations.

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Costs for Decision Making

• Carmen’s Cookies has been making and sellingcookies through a small store downtown.

• One of her customers suggests that she expandoperations and sell to wholesalers and retailers.

• Should Carmen expand operations?

LO3

1 - 6

Carmen’s Cost Drivers

DriverCost

Rent

Insurance

Labor

IngredientsNumber of cookies

LO3

1 - 7

Differential Costs, Revenues, and Profits

Sales revenueCosts:

FoodLaborUtilitiesRentOther

Total costs

Operating profits

$6,300

1,800 1,000 400 1,250 1,000$5,450

$ 850

$8,505a

2,700b

1,500b

600b

1,250 1,200c

$7,250

$1,255

$2,205

900 500 200 -0- 200$1,800

$ 405

(1) Status QuoOriginal Shop

Sales Only

(2) AlternativeWholesale & Retail

Distribution (3) Difference

Carmen’s CookiesProjected Income Statement for One Week

(a) 35 percent higher than status quo

(b) 50 percent higher than status quo

(c) 20 percent higher than status quo

LO3

1 - 8

Responsibility Centers,Revenues, and Costs

Carmen DiazPresident

Ray AdamsVice-President

Retail Operations

Cathy PetersonVice-President

Wholesale Operations

LO3

1 - 9

Responsibility Centers, Revenues, and CostsCarmen’s CookiesIncome Statement

For the Month Ending April 30

Sales revenueDepartment costs:

FoodLabora

UtilitiesRent

Total department costsCenter marginb

General and admin. costs:General manager’s salaryc

Other (administrative)Total general and admin. costsOperating profit

$28,400

13,500 4,500 1,800 5,000$24,800$ 3,600

$23,600

9,800 3,200 2,100 2,500$17,600$ 6,000

$52,000

23,300 7,700 3,900 7,500$42,400$ 9,600

5,000 3,200$ 8,200$ 1,400

RetailOperations

WholesaleOperations Total

(a) Includes department managers’ salaries but excludes Carmen’s salary

(b) The difference between revenues and costs attributable to a responsibility center

(c) Carmen’s salary

LO3

1 - 10

Responsibility Centers, Revenues, and CostsCarmen’s Cookies

Retail Responsibility CenterBudgeted versus Actual CostsFor the Month Ending April 30

Food:FlourEggsChocolateNutsOther

Total foodLabor:

ManagerOther

Total laborUtilitiesRentTotal cookie costsNumber of cookies sold

$ 2,100 5,200 2,000 2,000 2,200$13,500

3,000 1,500$ 4,500 1,800 5,000$24,800 32,000

$ 2,200 4,700 1,900 1,900 2,200$12,900

3,000 1,500$ 4,500 1,800 5,000$24,200 32,000

$ (100) 500 100 100

-0- $ 600

-0- -0- $ -0- -0-

-0- $ 600 -0-

Actual Budget Difference

LO3

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Trends in Cost Accounting

1. Research and development

2. Design

3. Purchasing

4. Production

5. Marketing

6. Distribution

7. Customer service

8. ERP – Enterprise resource planning

9. Creating value in the organization

L.O. 4 Identify current trends in cost accounting.

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Enterprise Resource Planning

• Information technology linking various processesof the enterprise into a single comprehensiveinformation system

Technology

Purchasing

Human Resources

Marketing

Production

Finance

LO4

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Ethical Issues for Accountants

• The design of the cost accounting system hasthe potential to be misused to defraud customers,employees, or shareholders.

L.O. 5 Understand ethical issues faced by accountantsand ways to deal with ethical problems that youface in your career.

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Sarbanes-Oxley Act of 2002

What is theintent?

Who isimpacted?

How arecorporationsimpacted?

Address problemof corporategovernance

Accounting firmsand

corporations

Corporateresponsibility

LO5

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Appendix 1

Institute of Management Accountants’ (IMA)Code of Ethics: Standards

1. Competence

2. Confidentiality

3. Integrity

4. Credibility

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End of Chapter 1

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin