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Cost Accounting Foundations and Evolutions

Kinney and Raiborn Seventh Edition

Chapter 1 Introduction to Cost Accounting


COPYRIGHT 2009 South-Western, a part of Cengage Learning. South-Western is a trademark used herein under license

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Learning Objectives (1 of 3)
Describe the relationships among financial, management, and cost accounting Identify the sources of authoritative pronouncements for the practice of cost accounting Identify the sources of ethical standards for cost accounting
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Learning Objectives (2 of 3)
Describe a mission statement and why it is important to organizational strategy Explain what accountants must understand about an organizations structure and business environment in order to perform effectively in that organization

Learning Objectives (3 of 3)
Describe a value chain and the major value chain functions Describe how a balanced scorecard is used to implement an organizations strategy Describe why ethics is so important in an organization

Accounting

The Language of Business


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Accountants
Financial accountants provide information to external parties investors, creditors, regulators

Managerial accountants provide information to internal users - managers Cost accountants provide information to both internal and external users product
cost information
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Two Types of Accounting


Financial
Meet external information needs Comply with GAAP

Management
Meet internal information needs Does not have to comply with GAAP

Accounting Differences
Financial
External focus Whole organization Historical Quantitative Monetary Verifiable GAAP Formal recordkeeping

Accounting Differences
Financial
External focus Whole organization Historical Quantitative Monetary Verifiable GAAP Formal recordkeeping

Managerial
Internal focus Segments or divisions Current/projected Quantitative/qualitative Monetary and nonmonetary Timely/reasonable estimate Benefits exceed costs Formal and informal 9 recordkeeping

Relationship of Financial, Management, and Cost Accounting Product Costs

FINANCIAL ACCOUNTING

COST MANAGEMENT ACCOUNTING ACCOUNTING

External parties - stockholders, creditors, regulators


For investment and credit decisions Complies with GAAP Enterprise focus

Product Cost Information

Internal parties
Planning, controlling, decision making Evaluating performance Includes upstream and downstream costs Disaggregated
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Professional Ethics
Earnings management--deliberate accounting adjustments to hit profit targets Often adjustments involve cost accountingproduct costs and inventory valuations Stretching legitimate accounting techniques Outright fraud
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Ethics and Legislation


Code of ethics for professional accountants Approved (PICPA) to be recommended for adoption by the (BOA) and approval of (PRC) January, 2004 Revised Code of Good Governance SEC circular 6 series of 2009

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Ethics & Management Accountants


Standards of Ethical Conduct for Management Accountants
Competence Confidentiality Integrity Objectivity

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Organizational Strategy
1. Develop Mission Statement 2. Implement strategy 3. Deploy resources to create value for customers and shareholders 4. Recognize that each organization is uniquethus unique strategies must be developed
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Organizational Strategy
1. Develop Mission Statement 2. Implement strategy
Establish appropriate measures of accomplishment Develop, implement, and monitor necessary information systems
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Organizational Strategy
Five factors core competencies organizational structure management style and organizational culture organizational constraints environmental constraints
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Organizational Strategies

Core competency critical function or activity providing a competitive advantage Cost leadership strategy - undercut competitor prices Product differentiation strategy - superior quality products or unique services sold at a premium
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Organizational Structure
Distribution of authority and responsibility in an organization Authority right to use resources to accomplish a task or achieve an objective Responsibility obligation to accomplish a task or achieve an objective

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Organizational Structure
Line manager works directly toward attaining organizational goals Staff employees give assistance and advice to line managers Treasurer and Controller

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Value Chain
Set of value-adding functions and processes that convert inputs into products/services
Research and Development Product Design Supply Production Marketing Distribution Customer Service

Communicate strategy to all members of the value chain 22

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Balance Scorecard
Four perspectives Learning and Growth Internal Business Customer Value Financial

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Balanced Scorecard
Learning and Growth Customer Value

Internal Business
Financial
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Balanced Scorecard
Learning and Growth
Use the organizations intellectual capital to adapt to changing customer needs or to influence new customers needs and expectations through product or service innovations

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Balanced Scorecard
Learning and Growth Internal Business
Things to do well to meet customer needs and expectations

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Balanced Scorecard
Learning and Growth Internal Business
Things to do well to meet customer needs and expectations

Customer Value
How well the organization is doing relative to important customer criteria

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Balanced Scorecard
Learning and Growth Internal Business
Things to do well to meet customer needs and expectations

Customer Value
How well the organization is doing relative to important customer criteria

Financial
Address stockholders/stakeholders concerns about profitability and organizational growth
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Balanced Scorecard
Four perspectives Learning and Growth Internal Business Customer Value Financial Performance

Measures Short-term and long-term Internal and external Financial and nonfinancial
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Ethics in Multinationals
Foreign Corrupt Practices Act prohibits bribes to obtain/retain business Organization of Economic Cooperation and Development Convention crime to offer, promise, give bribes to obtain/retain internal business deals

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Questions
What is the relationship among financial, management, and cost accounting? How is the balanced scorecard used to implement an organizations strategy? Where can an accountant find ethical standards for cost accountants?

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Potential Ethical Issues


Earnings management Low cost production at any cost Whistleblower retaliation Fixing prices Bribery and other corruption Hiding managerial acts
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