Chapter 1:

Introduction to Cost
Accounting
Cost Accounting:
Foundations and Evolutions, 8e
Kinney Raiborn

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Learning Objectives

What are the relationships among financial, management, and cost

accounting?
What are the the sources of authoritative pronouncements for the
practice of cost accounting?
What are the sources of ethical standards for cost accountants?
What is a mission statement, and why is it important to
organizational strategy?
What must accountants understand about an organizations
structure and business environment in order to perform effectively in
that organization?
What is a value chain, and what are the major value chain
functions?
How is a balanced scorecard used to implement an organizations
strategy?
Why is ethical behavior so important in organizations?

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Accountants

Financial accountants provide information to

external parties

Managerial accountants provide information to

internal users

Investors
Creditors
Regulators

Managers

Cost accountants provide information to both

internal and external users

Product cost information

Accounting is the language of business.

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Relationship of Financial,
Management, and Cost Accounting
Product
Costs

FINANCIAL
ACCOUNTING

COST
MANAGEMENT
ACCOUNTIN ACCOUNTING
G

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Types of Accounting
Financial

Meet external
information needs
Comply with GAAP

Management

Meet internal
information needs
Does not have to
comply with GAAP

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Financial versus Managerial

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
recordkeeping

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Product Cost Information

External partiesstockholders, creditors, and

regulators

For investment and credit decisions

Complies with GAAP
Enterprise focus

Internal parties

Planning, controlling, and decision making

Evaluating performance
Includes upstream and downstream costs
Disaggregated

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Accounting Bodies
Financial
Public Company
Accounting Oversight
Board (PCAOB)
Securities and
Exchange Commission
(SEC)
Financial Accounting
Standards Board
(FASB)

Management
Institute of
Management
Accountants (IMA)
Society of Management
Accountants of Canada
Cost Accounting
Standards Board
(CASB)

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Management Accounting
Organizations

IMA

Society of Management Accountants of

Canada

Statements on Management Accounting

(not legally binding)

Management Accounting Guidelines

(not legally binding)

Cost Accounting Standards Board (CASB)

Government contracting standards

(legally binding)

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Professional Ethics

Earnings managementdeliberate
accounting adjustments to hit profit targets
Often adjustments involve cost accounting

Product costs
Inventory valuations

Stretching legitimate accounting techniques

Outright fraud

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Ethics and Legislation

Sarbanes-Oxley ActCEOs and CFOs

personally accountable for the accuracy of
their organizations financial reporting
False Claims Actwhistle-blower protection
and penalties for failure to blow the whistle
(disclose known financial frauds)

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Ethics and Management Accounting

Standards of Ethical Conduct for

Management Accountants

Competence
Confidentiality
Integrity
Credibility

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Organizational Strategy
1.
2.
3.

4.

Develop mission statement

Implement strategy
Deploy resources to create value for
customers and shareholders
Recognize that each organization is unique
thus unique strategies must be developed

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Organizational Strategy
1.
2.

Develop mission statement

Implement strategy

Establish
appropriate
measures of
accomplishment

Develop,
implement, and
monitor
necessary
information
systems

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Five Factors in Organizational

Strategy

Core competencies
Organizational structure
Management style and organizational culture
Organizational constraints
Environmental constraints

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Organizational Strategies

Core competencycritical function or

activity providing a competitive advantage
Cost leadership strategyundercut
competitor prices
Product differentiation strategysuperior
quality products or unique services sold at
a premium

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Strategy Questions

Who are your five most important

competitors?
Is your firm more or less profitable
than these firms?
Compare prices for equivalent
products/services.

Are they higher or lower? Explain

the difference. Is it customers,
costs, or profit requirements?

Are your costs higher or lower than

those of main competitors? Where
are the differences most
pronounced?
What segment(s) of your business
represents 80% profits?
For each business segment above,
how large are you relative to the
largest competitors? Are you gaining
or losing relative market share?

What are your customers most

important purchase criteria?
How do you and your competitors
rate on these purchase criteria?
What are your main strengths and
competencies? Are they appreciated
by the market?
Which are your priority segments?
Where is it most important that you
gain market share?
What is your competitive advantage?

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Organizational Structure

Distribution of authority and responsibility in an

organization
Authorityright to use resources to accomplish a
task or achieve an objective
Responsibilityobligation to accomplish a task or
achieve an objective
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

A set of value-adding functions and

processes that converts inputs into
products or services
Research and
Development
Product Design
Supply
Production

Marketing
Distribution
Customer Service

Communicate strategy to all members of the value chain.

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Components of the Value Chain

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Balanced Scorecard

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Balanced Scorecard Perspectives

Learning and Growth

Internal Business

Things to do well to meet customer needs and expectations

Customer Value

Use the organizations intellectual capital to adapt to changing

customer needs or to influence new customers needs and
expectations through product or service innovations

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 Measures

Short-term and long-term

Internal and external
Financial and nonfinancial

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Ethics in Multinationals

Foreign Corrupt Practices Actprohibits

bribes to obtain/retain business
Organization of Economic Cooperation and
Development Conventioncrime 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 accounting?

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or duplicated, in whole or in part, except for use as permitted in a license

Potential Ethical Issues

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

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