CHAPTER 1 | INTRODUCTION TO COST ACCOUNTING Information Must be May be

characteristics • Historical • Current or forecasted

FIRST PART •Quantitative • Quantitative or
traditional methods of cost and management accounting, • Monetary qualitative
(which are the building blocks for generating information • Verifiable • Monetary or
used to satisfy internal and external user needs) nonmonetary
SECOND PART • Timely and, at a
minimum, reasonably
innovative cost and management accounting topics and
estimated
methods
Overriding criteria -GAAP -Situational relevance
-Consistency (usefulness)
Accounting is called the language of business. -Verifiability -Benefits in excess of
costs
2 ”DIALECTS” -Flexibility
1. FINANCIAL ACCOUNTING Recordkeeping Formal Combination of formal
- primary focus of accounting and informal
- concentrates on the preparation and provision of
financial statements: *As companies grew and were organized across multiple
 balance sheet locations, financial accounting
 income statement became less appropriate for satisfying management’s
 cash flow statement information needs.
 statement of changes in stockholders’ equity
2. MANAGEMENT AND COST ACCOUNTING Larger percentage of total costs
MANAGEMENT ACCOUNTING UPSTREAM COSTS
- Providing information to parties inside an (research, development, product design, and supply chain)
organization so that they can plan, control DOWNSTREAM COSTS
operations, make decisions, and evaluate (marketing, distribution, and customer service)
performance

FINANCIAL ACCOUNTING
Objective: provide useful information to external parties,
including investors and creditors
- requires compliance with generally accepted
accounting principles (GAAP)
- historical, quantitative, monetary, and verifiable
- Companies often used return on investment (ROI)
to allocate resources and evaluate divisional
performance (INCOME/ASSETS)

MANAGEMENT ACCOUNTING COST ACCOUNTING

gather the financial and nonfinancial information - intersection between financial and management
needed by internal users accounting
- commonly addresses individual or divisional - addresses the informational demands of both
concerns rather than those of the firm as a whole financial and management accounting by providing
- not required to adhere to GAAP but provides both product cost information to
historical and forward-looking information for • external parties (stockholders, creditors,
managers.
and various regulatory bodies) for
investment and credit decisions and for
reporting purposes
Financial Management
• internal managers for planning,
Accounting Accounting
controlling, decision making, and
Primary users External Internal
evaluating performance.
Primary Whole Parts (segmented)
organizational focus (aggregated)

PRODUCT COST
- developed in compliance with GAAP for financial
reporting purposes, and, for a manufacturing
company, consists of the sum of all factory costs
incurred to make one unit of product.
- But can also be developed outside of the
constraints of GAAP to assist management in its
needs for planning and controlling operations
COST ACCOUNTING STANDARDS
3 bodies issue cost accounting guidelines or standards
1. Institute of Management Accountants (IMA)
- voluntary membership organization of
accountants, finance specialists, academics, etc
- issues directives called Statements on
Management Accounting (SMAs)
• not legally binding, but their rigorous
developmental and exposure process helps ensure
their wide support
2. Society of Management Accountants of Canada
- issues Management Accounting Guidelines (MAGs)
• not mandatory for organizational accounting but
suggest high-quality accounting practices
3. Cost Accounting Standards Board (CASB)
- part of the U.S. Office of Federal Procurement
Policy
- purpose is to issue cost accounting standards for
defense contractors and federal agencies to help
ensure uniformity and consistency in government
contracting
- Compliance with CASB standards is required for
companies bidding on or pricing cost-related
contracts of the federal government.
PROFESSIONAL ETHICS
EARNINGS MANAGEMENT
- any accounting method or practice used by
managers or accountants to deliberately “adjust” a
company’s profit amount to meet a predetermined
internal or external target
- allows a company to meet earnings estimates,
preserve a specific earnings trend, convert a loss to
a profit, increase management compensation (tied
to stock performance), or hide illegal transactions
STATEMENT OF ETHICAL PROFESSIONAL PRACTICE
COMPETENCE
Each member has a responsibility to:
• Maintain an appropriate level of professional expertise by
continually developing knowledge and skills.
• Perform professional duties in accordance with relevant laws,
regulations, and technical standards.
• Provide decision support information and recommendations
that are accurate, clear, concise, and timely.
• Recognize and communicate professional limitations or other
constraints that would preclude responsible judgment or
successful performance of an activity.
CONFIDENTIALITY
Each member has a responsibility to:
• Keep information confidential except when disclosure is
authorized or legally required.
• Inform all relevant parties regarding appropriate use of
confidential information. Monitor subordinates’ activities to
ensure compliance.
• Refrain from using confidential information for unethical or
illegal advantage.
INTEGRITY
Each member has a responsibility to:
• Mitigate actual conflicts of interest. Regularly communicate with
business associates to avoid apparent conflicts of interest. Advise
all parties of potential conflicts.
• Refrain from engaging in any conduct that would prejudice
carrying out duties ethically.
• Abstain from engaging in or supporting any activity that might
discredit the profession.
CREDIBILITY
Each member has a responsibility to:
• Communicate information fairly and objectively.
• Disclose all relevant information that could reasonably be
expected to influence an intended user’s understanding of the
reports, analyses, or recommendations.
• Disclose delays or deficiencies in information, timeliness,
processing, or internal controls in conformance with organization
policy and/or applicable law.
COMPETENCE
- means that individuals will develop and maintain
the skills needed to practice their profession.
Ex. cost accountants working in companies involved in
government contracts must be familiar with both GAAP
and CASB standards
CONFIDENTIALITY
- means that individuals will refrain from disclosing
company information to inappropriate parties
(such as competitors)
INTEGRITY
- means that individuals will not participate in
activities that would discredit their company or
profession.
Ex. it would preclude cost accountants from accepting
gifts from suppliers because such gifts could bias (or be
perceived to bias) the accountants’ ability to fairly
evaluate the suppliers and their products
CREDIBILITY
- means that individuals will provide full, fair, and
timely disclosure of all relevant information
Ex. a cost accountant should not intentionally
miscalculate product cost data to materially misstate a
company’s financial position or results of operations
ORGANIZATIONAL STRATEGY
MISSION STATEMENT
- expresses the purposes for which the organization
exists, what the organization wants to accomplish,
and how its products and services can uniquely
meet its targeted customers’ needs
- used to develop the organization’s strategy or plan
for how the firm will fulfill its goals and objectives
by deploying its resources to create value for
customers and shareholders
- modified over time to adapt to the ever-changing
business environment
CORE COMPETENCY
any critical function or activity in which an organization
seeks a higher proficiency than its competitors, making
that function or activity the root of competitiveness and
competitive advantage
Ex. Technological innovation, engineering, product
development, and after-sales service
Strategy
COST LEADERSHIP
- refers to a company’s ability to maintain its
competitive edge by undercutting competitor
prices
- Successful cost leaders focusing almost exclusively
on manufacturing products or providing services at
a low cost
EX. Walmart, the Honda Fit, and Bic pens compete in
their markets based on prices.
PRODUCT DIFFERENTIATION
- refers to a company’s ability to offer superior
quality products or more unique services than
competitors; such products and services are,
however, generally sold at premium prices.
Ex. Neiman Marcus, the Honda Acura, and Mont Blanc
pens compete on quality and features. Successful
companies generally focus on one strategy or the
other; however, many firms focus on both strategies at
the same time (possibly for different product lines),
although one often dominates.
ORGANIZATIONAL STRUCTURE
- reflects the way in which authority and
responsibility for making decisions are distributed
in an organization.
AUTHORITY
- refers to the right (usually by virtue of position or
rank) to use resources to accomplish a task or
achieve an objective
RESPONSIBILITY
- obligation to accomplish a task or achieve an
objective.
Line personnel
• work directly toward attaining organizational goals
• Persons in these positions will be held responsible
for achieving targeted balanced scorecard
measures or budgeted operating income for their
divisions or geographic regions.
Staff personnel
• Give assistance and advice to line personnel
• Relative to top accounting jobs, the treasurer and
controller are staff positions.
Treasurers
- generally responsible for achieving short- and long-
term financing, investing, and cash management
goals
Controllers
- responsible for delivering financial reports in
conformity with GAAP to management.
3 COMMON ORGANIZATIONAL CONSTRAINTS
1. MONETARY CAPITAL
- Although it can almost always be acquired through
borrowings or equity sales, management should
decide whether
• the capital can be obtained at a reasonable
cost and/or
• whether a reallocation of current capital would
be more effective and efficient.
2. INTELLECTUAL CAPITAL
- encompasses all of an organization’s intangible
assets: knowledge, skills, and information.
- Companies rely on their intellectual capital to
create ideas for products or services, to train and
develop employees, and to attract and retain
customers.
3. TECHNOLOGY
- companies must adopt emerging technologies to
stay at the top of their industry and achieve a
competitive advantage over competitors.
CULTURE
- has a significant role in determining whether the
communication system tends to be formal or
informal, whether authority is likely to be
concentrated in management or distributed
throughout the organization, and whether there
are feelings of well-being or stress in organizational
members.
ENVIRONMENTAL CONSTRAINTS
- any limitation caused by external cultural, fiscal
(such as taxation structures), legal/regulatory, or
political situations and by the competitive market
structures.
VALUE CHAIN
- Strategic management’s foundation
- which is used to identify the processes that lead to
cost leadership or product differentiation.
- a set of value-adding functions or processes that
convert inputs into products and services for
company customers.
Examples from General Motors are used to illustrate the
functions within the value chain.
• Research and Development
- experimenting to reduce costs or improve quality.
Ex. GM can experiment with various paint formulas to
produce the most lasting exterior paint finish.
• Design
- developing alternative product, service, or process
designs.
Ex. In 1996, GM changed the Corvette design by
moving the transmission to the back of the car; this
change gave passengers more leg room. Many
companies have redesigned plant layouts to reduce
product manufacturing time.
• Supply
- managing raw materials received from vendors.
Companies often develop longterm alliances with
suppliers to reduce costs and improve quality.
Ex. Johnson Controls is the supplier for some General
Motors cars’ seating systems, electronics, instrument
panels, overhead systems, floor consoles, door
systems, and cargo management systems. The
relationship is working well, given that Johnson
Controls is considered one of GM’s top suppliers
almost every year. In many instances, suppliers
become extensions of a company’s upstream
operations.
• Production
- acquiring and assembling resources to
manufacture a product or render a service. F
Ex. For GM, production reflects the acquisition of tires,
metal, paint, fabric, glass, electronics, brakes, and
other inputs and the assembly of those items into an
automobile.
• Marketing
- promoting a product or service to current and
prospective customers.
Ex. Promotion could involve developing a Super Bowl
half-time commercial, placing automobiles on a
showroom floor, designing a billboard advertisement,
or recording a radio announcement to inform
customers about the company’s products or services.
• Distribution
- delivering a product or service to a customer.
Ex. GM uses trains and trucks to deliver automobiles to
dealerships. Other companies could use airlines or
couriers to distribute their products.
• Customer Service
- supporting customers after the sale of a product or
service.
Ex. GM provides a 1-800 number for its customers to
call if they have questions or need roadside service.
Other companies may require customers to return a
product if it needs repair.

BALANCED SCORECARD
Accounting information helps managers to measure
dimensions of performance that are
important in accomplishing strategic goals.
Historical financial data reflect
LAG INDICATORS
- or outcomes that resulted from past actions, such
as installing a new production process or
implementing a new software system.
Ex. an increase in operating profits (lag indicator) could
occur after a new production process is installed.
LEAD INDICATORS
- reflect future outcomes and thereby help assess
strategic progress and guide decision making
before lag indicators are known.
Ex. a lead indicator is the number of employees trained
on a new accounting information system. The
expectation is that the more employees who are
trained to use the new system, the more rapidly orders
will be processed, the more satisfied customers will be
with turnaround time after placing an order, and the
more quickly profits will be realized.
If fewer employees are trained (lead indicator) than were
planned to be trained, future profits (lag indicator) will
decrease (or not increase as expected) because some
customers will be unhappy with sales order turnaround
time.
BALANCED SCORECARD (BSC)
- a framework that translates an organization’s
strategy into clear and objective performance
measures (both leading and lagging) that focus on
customers, internal business processes,
employees, and shareholders. Thus, the BSC
provides a means by which actual business
outcomes can be evaluated against performance
targets.
- includes short-term and long-term, internal and
external, and financial and nonfinancial measures
to balance management’s view and execution of
strategy.
4 PERSPECTIVES
1. LEARNING AND GROWTH PERSPECTIVE
- focuses on using the organization’s intellectual
capital to adapt to changing customer needs or to
influence new customers’ needs and expectations
through product or service innovations.
- addresses whether a company can continue to
progress and be seen by customers as adding value
2. INTERNAL BUSINESS PERSPECTIVE
- focuses on those things that the organization must
do well to meet customer needs and expectations
- concentrates on issues such as employee
satisfaction, product quality control, and cost
reduction
3. CUSTOMER VALUE PERSPECTIVE
- addresses how well the organization is doing
relative to important customer criteria such as
speed (lead time), quality, service, and price (both
purchase and after purchase)
- Customers must believe that, when a product or
service is purchased, the price paid was worth the
value received
4. FINANCIAL PERFORMANCE PERSPECTIVE
- addresses the concerns of stockholders and other
stakeholders about profitability and organizational
growth
- A company could, for example, reduce costs by
outsourcing its technologies to countries where
labor costs are lower.
ETHICS IN MULTINATIONAL CORPORATIONS
Accountants and other individuals working for
multinational companies should be aware of not only their
own company’s and the IMA’s code of ethical conduct but
also the laws and ethical parameters within countries in
which the multinational enterprise operates.