cost accounting horngreen, datar, foster the accountant’s role in the organization session 1

Cost Accounting Horngreen, Datar, Foster

The Accountant’s RoleThe Accountant’s Rolein the Organizationin the Organization

Session 1


Learning Objective 1Learning Objective 1

Describe how cost accounting supports

management accountingand financial accounting.


Management vs Financial Management vs Financial AccountingAccounting

Management Accounting:• It measures and reports financial and nonfinancial information that

helps managers make decisions to fulfill the goals of an organization.

Financial Accounting:• Its focus is on reporting to external parties.• It measures and records business transactions.• It provides financial statements based on generally accepted

accounting principles.


Cost Accounting vs Cost Cost Accounting vs Cost ManagementManagement

Cost Accounting: • It provides information for both management accounting and

financial accounting. • It measures and reports financial and nonfinancial data.

Cost Management:• 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.



Distinguish between theplanning and control

decisions of managers.


Planning and ControllingPlanning and Controlling

Management Decision Management Accounting System

Planning

Control

PerformanceEvaluation

Budgets

AccountingSystem

PerformanceReports

Fee

db

ack


Planning and ControllingPlanning and Controlling

What is planning?• Setting Goals

• Predicting Results

• Deciding how to attain goals

What is control?• Deciding and taking actions

• Deciding on performance evaluation and feedback

What are budgets? • They are quantitative expressions of a proposed plan of action

• They aid in the coordination and implementation of the plan.

What are performance reports?• These are reports that compare actual results with budgeted amounts


Performance Report ExamplePerformance Report Example

Budget Actual VarianceRevenues $59,000 $60,000 $1,000 FCost of goods sold 42,000 43,400 1,400 UWages 6,700 7,000 300 UGeneral 1,300 900 400 FFixed costs 5,000 5,000 0 Operating income $ 4,000 $ 3,700 $ 300 U

Boone Shop, July 2003


Performance Report ExamplePerformance Report Example

Actual cost of goods sold were 72% of revenues instead of the budgeted 71%.

Feedback: This involves managers examining past performance and systematically exploring alternative ways to make better informed decisions in the future.

Budget % Actual %Revenues $59,000 100 $60,000 100Cost of goods sold 42,000 71 43,400 72Gross margin $17,000 29 $16,600 28



Distinguish among the problem-solving, scorekeeping, andattention-directing roles of management accountants.


Problem Solving, Score Keeping, Problem Solving, Score Keeping, Attention DirectingAttention Directing

Problem Solving:• This involves comparative analysis for decision making.

• This role asks: Of the several alternatives available, which is the best?

Score Keeping: • This involves accumulating data and reporting reliable results toall levels of

management.

• This role asks: How is the business doing?

Attention Directing:• 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.



Identify four themes managersneed to consider for attaining success.


Key Themes in ManagementKey Themes in ManagementDecision MakingDecision Making

Customer Focus

Value Chainand

Supply ChainAnalysis

Key Success Factors:Cost and Efficiency,

Time, Quality,Innovation

ContinuousImprovement

andBenchmarking


Value Chain and Supply Chain Value Chain and Supply Chain AnalysisAnalysis

This theme has two related aspects:• Treat each of the business functions in the value chain as an

essential and valued contributor.• Integrate and coordinate the efforts of all business functions in

addition to developing the capabilities of each individual business function.

Supply chain• describes the flow of goods, services, and information from cradle to

grave,• regardless of whether those activities occur in the same organization

or other organizations.


Key Success FactorsKey Success Factors

These are operational factors that directly affect the economic viability of the organization.• Cost – organizations are under continuous pressure to reduce

costs.• Quality – customers are expecting higher levels of quality.• Time – organizations are under pressure to complete activities

faster and to meet promised delivery dates more reliably.• Innovation – there is now heightened recognition that a

continuing flow of innovative products or services is a prerequisite to the ongoing success of most organizations.


Continuous ImprovementContinuous Improvementand Benchmarkingand Benchmarking

Continuous improvement by competitors creates a never-ending search for higher levels of performance within many organizations.



Describe the set of businessfunctions in the value chain.


Value ChainValue Chain

The term “value chain” refers to the sequence of business functions in which usefulness is added to the products or services of an organization.

The term “value” is used because as the usefulness of the product or service is increased, so is its value to the customer.

Management accountants provide decision support for managers in the following six

business functions:


Value ChainValue Chain

R & D Design Production

Marketing Distribution Service

Management Accounting


Value Chain FunctionsValue Chain Functions

Research and Development• It is the process that is conducted to generate and

experiment with ideas related to new products, services, or processes.

Design: • It is the detailed planning and engineering of products,

services, or processes.

Production: • It is the acquisition, coordination, and assembly of resources

to produce a product or deliver a service.


Value Chain FunctionsValue Chain Functions

Marketing: • It is the manner by which companies promote and sell

their products or services to customers or prospective customers.

Distribution: • It is the delivery of products or services to the customer.

Service: • It is the after-sale support activities provided to

customers.



Describe three waysmanagement accountants

support managers.


Key GuidelinesKey Guidelines

1. Cost-benefit approach

2. Full recognition of behavioral as well as technical considerations

3. Using different costs for different purposes


Cost-Benefit ApproachCost-Benefit Approach

A cost-benefit approach should be used in orderto spend resources if they promote decisionmaking that better attains organization goals

in relation to the costs of those resources.


Behavioral and TechnicalBehavioral and TechnicalConsiderationsConsiderations

A management accounting system should have two simultaneous missions for providing information:

To help managers make wise economic decisions To help managers and other employees to aim and

strive for goals of the organization


Different Costs for Different Different Costs for Different PurposesPurposes

A cost concept used for the external reporting purpose need not be the appropriate concept for the purpose of internal routine reporting to managers.

A cost concept used for short time decisions need not to be the appropriate concept for long term decisions

A cost concept used for pricing need not to be appropriate for performance evaluation purposes



Understand how cost managementaccounting fits into an

organization’s structure.


Line and Staff RelationshipsLine and Staff Relationships

Line management is directly responsible for attaining the objectives of the organization.

Staff management exists to provide advice and assistance to line management.

* G lob a l F in a n c ia l P la n n in g /B u d ge tin g* O p e ra tio n s A d m in is tr a tion* P r o fitab ility R e p o r tin g* In v e n to ry

* R o y a ltie s* G e n er a l L e d g er* A c c ou n ts P a y a b le a n d R e c eiv a b le* S u b s id iar y a n d L iaiso n A c c o u n tin g

E x a m p le s o f F u n c tio n s:

C o n tr o ller


Line and Staff RelationshipsLine and Staff Relationships

C o n tr o ller A u d it T a x T r e asu ry R iskM a n a ge m e nt

In v e storR e la tio ns

C h ie f F in a n c ial O ffic er (C F O )

P r e sid e ntC h ie f O p e r a tin g O ffic er (C O O )

C h a ir m anC h ie f E x e c u tiv e O ffic er (C E O )

B o a r d o f D ire c to rs

cost accounting horngreen, datar, foster the accountant’s role in the organization session 1

Documents

cost accounting horngreen

accepted accounting

foster planning

f cost of goods

foster problem

foster learning objective

past performance

general management strategies