ie 618 spring 2013…slide content extracted from hansen

IE 618 Spring 2013…Slide content extracted from Hansen, Mowen, & Guan 1


Grade:

•  25 % Exam 1

•  25 % Exam 2

•  30 % Team Project

•  10 % Corporate Profiles

•  10 % Homework

•  Class Attendance and Participation

IE 618 – Spring 2014


IE 618 – Spring 2014


Team Project


Corporate Profiles

Introduction to Cost Management

7

Chapter 1 Objectives

1.  Describe cost management and explain how it differs from financial accoun;ng.

2.  Iden;fy the current factors affec;ng cost management.

3.  Describe how management accountants func;on within an organiza;on.

4.  Understand the importance of ethical behavior for management accountants.

5.  Iden;fy the three forms of cer;fica;on available to internal accountants.

8

Financial Accounting vs. Management Accounting:

A Systems Framework

9

Accoun&ng Informa&on System •  Consists of interrelated manual and computer parts •  Uses processes such as collec;ng, recording, summarizing, analyzing, and managing data to transform inputs into informa;on that is provided to users.

Two major systems: •  The financial accoun;ng informa;on system •  The cost managerial accoun;ng informa;on system

The biggest difference between the two is the targeted user.

Objec;ve 1

Financial Accounting vs. Management Accounting:

A Systems Framework

•  Accoun&ng informa&on systems •  Financial accoun&ng

•  Produces outputs for external users. •  Follows rules and conven;ons such as those set by the SEC and FASB.

•  Creates outputs such as financial statements. •  Cost management

•  Produces outputs for internal users. •  Designed to cost services, products and other objects. •  Is used in planning and control and decision making. Criteria and formats set internally.

•  Outputs include reports, schedules and analyses.

10 Objec;ve 1

Cost Management Accounting Information System

•  Two major subsystems of the Cost Management Accoun&ng Informa&on System •  Cost accoun&ng informa&on system

•  Assigns costs to individual products and services. •  Assists external financial repor;ng by valuing inventories and determining cost of sales. These assignments must conform to external rules.

•  Opera&onal control informa&on system •  Provides accurate and ;mely feedback concerning performance.

•  Improve profit by increasing customer value.

11 Objec;ve 1

Factors Affecting Cost Management

Global Compe&&on •  The new compe;;ve environment has increased the

demand not only for more cost informa;on but also for more accurate informa;on.

•  Vastly improved transporta;on and communica;on has led to a global market for many manufacturing and service firms.

12 Objec;ve 2


13

Growth of the Service Industry •  As the tradi;onal industries have declined in

importance, the service sector of the economy has increased in importance.

•  Deregula;on of many services has increased compe;;on in the service industry.

Objec;ve 2


14

Advances in Informa&on Technology •  Computers are used to monitor and control opera;ons.

•  The result is an opera;onal system that is fully integrated with marke;ng and accoun;ng data.

•  Increased ability to accurately cost products because of advances in tools.

•  Emergence of e-‐commerce •  Internet trading •  Electronic data interchange •  Bar coding •  RFID technologies

Objec;ve 2


15

Advances in Management Environment •  The theory of constraints is a method used to

con;nuously improve manufacturing ac;vi;es and nonmanufacturing ac;vi;es.

•  Just-‐in-‐1me manufacturing is a demand-‐pull system that strives to produce a product only when it is needed and only in the quan;;es demanded by customers.

•  Lean Manufacturing is the persistent pursuit and elimina;on of waste which simultaneously embodies respect for people.

•  Computer-‐integrated manufacturing is the automa;on of the manufacturing environment.

Objec;ve 2


16

Customer Orienta&on •  Firms are compe;ng not only in terms of technology and

manufacturing, but in the speed of delivery and response to deliver value to the customer.

•  Companies must also sa;sfy the needs of internal customers, such as staff func;ons exist to support line func;ons.

New Product Development •  Management recognizes that a high propor;on of produc;on

costs are commiVed during the development and design stage of a new product.

•  The requirement to control cost encourages the use of target cos1ng and ac1vity-‐based management.

Objec;ve 2


17

Total Quality Management •  Con;nual improvement and elimina;on of waste are the

two founda;on principles that govern a state of manufacturing excellence.

•  A philosophy of total quality management, in which managers strive to create an environment that will enable organiza;ons to manufacture perfect (fully compliant/zero defect) products, has replaced the acceptable quality aZtudes of the past.

Objec;ve 2


18

Time as a Compe&&ve Element •  Time is the crucial element in all phases of the value chain. •  Decreasing non-‐value-‐added ;me appears to go hand-‐in-‐hand

with increasing quality. •  Objec;ve: increase value and responsiveness to customer needs Efficiency •  While quality and ;me are important, improving these

dimensions without corresponding improvements in financial performance may be fu;le, if not fatal.

•  Cost is a cri;cal measure of efficiency. •  Efficiency: “Doing Things Right” •  Effec;veness: “Doing the Right Things”

Objec;ve 2

The Role of the Management Accountant

19

Line posi1ons are posi;ons that have direct responsibility for the basic objec;ves of an organiza;on. Staff posi1ons are posi;ons that are suppor;ve in nature and have only indirect responsibility for an organiza;on’s basic objec;ves.

Objec;ve 3

The role of today’s Cost and Management Accountant

20 Objec;ve 3

The role of today’s Cost and Management Accountant

The Controller Ø Financial reports Ø SEC repor;ng Ø Tax planning and repor;ng Ø Performance repor;ng Ø Internal audi;ng Ø Budge;ng Ø Accoun;ng systems and internal controls

The Treasurer Ø Collec;on of cash Ø Monitoring of cash payments

Ø Monitors cash availability Ø Short-‐term investments Ø Short and long-‐term borrowing

Ø Issuing of capital stock

21 Objec;ve 3

Information for Planning, Controlling, Continuous Improvement,

and Decision Making

22

Planning is the detailed formula;on of future ac;ons to achieve a par;cular end.

• Requires seZng objec;ves and iden;fying methods to achieve those objec;ves.

Controlling is the managerial ac;vity of monitoring a plan’s implementa;on and taking correc;ve ac;on as needed. Feedback is informa;on that can be used to evaluate or correct the steps being taken to implement a plan.

Objec;ve 3

Information for Planning, Controlling, Continuous Improvement,

and Decision Making

23

Con1nuous improvement is required in a dynamic environment if a firm is to remain compe;;ve or to establish a compe;;ve advantage. A relentless pursuit to deliver more value to the customer; and, always searching for ways to increase efficiency through: waste reduc;on, quality improvement, cost reduc;on, non-‐value added ac;vity elimina;on/reduc;on Decision making is the process of choosing among compe;ng alterna;ves

Objec;ve 3

Accounting and Ethical Conduct

24

Benefits of Ethical Behavior ü  Can create customer and employee loyalty ü  Avoid li;ga;on costs

Objec;ve 4

Standards of Ethical Conduct for Management Accountants •  Competence •  Confiden;ality •  Integrity •  Credibility

Certification

25

•  CMA: One of the main purposes of the CMA was to establish management accoun;ng as a recognized, professional discipline, separate from the profession of public accoun;ng.

•  CPA: The responsibility of a CPA is to provide assurance concerning the reliability of financial statements.

•  CIA: The focus of the CIA is to recognize competency in internal audi;ng rather than external audi;ng as with the CPA.

Objec;ve 5

Certification

26

Four areas emphasized on the CMA exam:

1)  Business analysis

2)  Management accoun;ng and repor;ng

3)  Strategic management

4)  Business applica;ons

Objec;ve 5

Basic Cost Management Concepts

2

1.  Describe a cost management informa;on system, its objec;ves, and its major subsystems, and indicate how it relates to other opera;ng and informa;on systems.

2.  Explain the cost assignment process. 3.  Define tangible and intangible products, and explain why

there are different product cost defini;ons. 4.  Prepare income statements for manufacturing and service

organiza;ons. 5.  Explain the difference between tradi;onal and

contemporary cost management systems.

Chapter 2 Objectives

3

System: a set of interrelated parts that performs one or more processes to accomplish specific objec;ves

•  Works by using processes to transform inputs into outputs that sa;sfy the system’s objec;ves

An informa;on system is designed to provide informa;on to people in the company who might need it.

A Systems Framework

Objec;ve 1

A Systems Framework

Objec;ve 1

Financial Accoun&ng Informa&on System •  Inputs: well-‐specified economic events •  Processes: rules and conven;ons established by the SEC

and FASB •  Outputs: financial statements for external users

Cost Management Informa&on System •  Inputs and processes: set by management; not bound by

externally imposed criteria •  Outputs: reports for internal users

A Systems Framework

Objec;ve 1

The cost management informa1on system has three broad objec;ves that provide informa;on for:

1) Cos;ng services, products, and other objects of interest to management

2) Planning and control

3) Decision making

The value chain is the set of ac;vi;es required to design, develop, produce, market, deliver, and provide post-‐sales service for the products and services sold to customers.

A Systems Framework

Objec;ve 1

A Systems Framework

Objec;ve 1

•  Costs are sacrifices made to obtain goods or services. As long as they remain unexpired, they are on the balance sheet as an asset.

•  Expenses are expired costs which are deducted from revenues on the income statement.

•  Cost Objects are anything for which costs are measured and assigned. Some cost objects are tangible, such as the product we make; others are not, such as ac;vi;es for which we wish to accumulate cost informa;on. –  Example: A bicycle is a cost object when you are determining the cost

to produce a bicycle –  Assigning costs accurately to cost objects is crucial …cost of resources

used by a cost object

2 Cost Assignment: Direct Tracing, Driver Tracing and Allocation

Objec;ve 2

Traceability means that costs can be assigned easily and accurately, using a causal rela;onship.

Methods of tracing: 1.   Direct tracing: relies on physical observance of causal

rela;onships to assign costs to cost objects—ex: direct mat’l 2.   Driver tracing: relies on drivers as causal factors to assign

costs to cost objects—ex: process energy consump5on

Costs that cannot be traced are considered indirect costs and are allocated to products in some predetermined way.

Note: whether direct or indirect cost depends on cost object-‐-‐plant hea;ng/cooling

Cost Assignment: Direct Tracing, Driver Tracing and Allocation

Objec;ve 2

Cost Assignment: Direct Tracing, Driver Tracing and Allocation

Objec;ve 2

•  Tangible products are goods produced by conver;ng raw materials into finished products.

•  Services are ac;vi;es performed for a customer or by a customer using the service provider’s products or facili;es. Services have three characteris;cs that separate them from tangible products: •  Intangibility •  Perishability •  Inseparability

3 Product and Service Costs

Objec;ve 3

Product and Service Costs

Objec;ve 3

•  Direct materials are those materials that are directly traceable to the goods or services being produced.

•  Example: The cost of wood in furniture. •  Direct labor is the labor that is directly traceable to the goods or services being produced.

•  Example: Wages of assembly-‐line workers. •  Overhead are all other manufacturing costs.

•  Example: Plant deprecia5on, u5li5es, property taxes, indirect materials, indirect labor (plant security), etc.

Manufacturing Costs (Production Costs)


Objec;ve 3

Typically, the most important cost object is the output of the organization: Product or Service…considered “product cost”

•  Prime Cost is the sum of direct materials and direct labor. •  Conversion Cost is the sum of direct labor and overhead.

• Note: Never add prime cost and conversion cost or you will have double counted labor because it is included in each defini5on!

Prime and Conversion costs


Objec;ve 3

•  Marke1ng (selling) costs are the costs necessary to market, distribute, and service a product or service.

•  Example: Adver5sing, storage, sales comm, and freight out. •  Administra1ve costs are the costs associated with research, development, and general administra;on of the organiza;on that cannot reasonably be assigned to either marke;ng or produc;on.

•  Example: Legal fees, salary of the chief execu5ve officer. Note: R&D costs may be separate from Admin Costs are the costs necessary to create the underlying innova;on, prototypes & development the technologies for a product or service.

Nonproduction Costs

(Period Costs)


Objec;ve 3


Objec;ve 3

•  Income Statement: Manufacturing Firm •  Prepared for external par;es •  Follows standard format •  Is referred to as an absorp&on-‐cos&ng or full-‐cos&ng income

statement because all manufacturing costs are absorbed into the cost of goods.

•  Cost of Goods Manufactured represents the total manufacturing cost of goods completed during the period.

•  Work in Process consists of all par;ally completed units found in produc;on at a given point in ;me (usually the end of one period/beginning of the next).

•  Cost of Goods Sold (COGS) is the manufacturing cost of all goods that were sold during the period.

External Financial Statements

Objec;ve 4

45

Income Statement: Manufacturing Firm

Sales 2,000,000$ Less: Cost of Goods Sold 1,300,000 Gross margin 700,000$ Less operating expenses:

Research and development 100,000$ Selling 300,000 Administrative 150,000 550,000

Operating income 150,000$

Manufacturing OrganizationIncome Statement

For the Year Ended December 31, 2010

From the Cost of Goods Sold Schedule

46

Statement of Cost of Goods Manufactured

47

2.3 Cost of Goods Sold Schedule

•  Tradi&onal Cost Management Systems •  Tradi&onal Cost Accoun&ng

•  Assumes all costs can be classified as fixed or variable with respect to changes in units or volume – called “unit-‐based costs”.

•  Allocates costs that are not unit-‐based. •  Tradi&onal Cost Control

•  Assigns costs to organiza;onal units and holds the unit manager responsible for controlling the assigned costs.

•  Performance is measured by comparing actual outcomes with standard or budgeted outcomes.

•  Emphasis is on financial measures of performance.

Traditional and Activity-Based Cost Management Systems

Objec;ve 5

•  Ac&vity-‐Based Cost Management Systems •  Ac&vity-‐Based Cost Accoun&ng

•  Emphasizes tracing over alloca;on •  Iden;fies non-‐unit-‐based ac;vity drivers—unrelated to volume of

products produced. Ex: material handling costs more accurately related to number of moves and not number of products moved.

•  Flexible system capable of producing cost informa;on for a variety of purposes.

•  Ac&vity-‐based Cost Control •  Seeks to understand and control ac5vi5es rather than costs. •  Ac&vity-‐based management (ABM) focuses on improving customer

value. •  Looks at the process view and focuses accountability on ac;vi;es to

maximize systemwide performance.


Objec;ve 5


Objec;ve 5

Comparison of Traditional and ABC Systems


Objec;ve 5

Trade-Off Between Measurement and Error Costs


Objec;ve 5

Shifting Measurement and Error Costs


Objec;ve 5

End of Chapter 2 54

ie 618 spring 2013…slide content extracted from hansen

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