COST Lesson 1 Flashcards
is the set of activities that transforms raw resources into the goods and services end users (households, for example) purchase and consume. It also includes the treatment or disposal of any waste generated by the end users .
Value Chains
▪ Those that customers perceive as adding utility to the goods or services they purchase .
▪ The value chain comprises activities from research and development (R&D) through the production process to customer service. Managers evaluate these activities to determine how they contribute to the final product’s service, quality, and cost .
Value-Added Activities
▪ Firms buy resources from suppliers (other companies, employees, etc.) These suppliers form the supply chain for the firm .
▪ Firms also sell their products to distributors and customers. This is the distribution chain of the firm.
Supply Chain and Distribution Chain
▪ How can cost information add value to the organization? The answer to this question depends on whether the information provided improves manager’s decisions. Suppose a production process is selected based on cost information indicating that the process would be less costly than all other options. Clearly, the information adds value to the process and its products.
The measurement and reporting of costs is a valuable activity. Suppose cost
information is received too late to help managers make a decision. Such
information would not add value.
Using Cost Information to increase Value
▪ In financial accounting, financial statements are prepared and interpreted for the firm. But at what stage in the value chain produced profits?
▪ In cost accounting, we need to understand how the individual stages contribute to value and how to work with other managers to improve performance. Although financial accounting and cost accounting are related, there are important differences.
Accounting and the Value Chain
- Information is designed for decision makers who are not directly involved in the daily management of the firm.
- External (investors, creditors)
- GAAP and PFRS compliant
- Historical data only
Financial Accounting
- Information is designed for managers.
- Internal users only
- Doesn’t need to comply with GAAP and PFRS
- Both historical and future-oriented data
Cost Accounting
➢ Why do organizations employ people?
➢ What do they do to add value?
➢ For line employees, those directly involved in the production or who interact with customers, the production of goods and services for the customers. The job however of managers is more difficult to describe because it tends to be varied and ambiguous. The common theme among
all managerial jobs, however, is decision making.
➢ Managers are paid to make decisions.
The Manager’s Job
Why do managers want to eliminate nonvalue-added activities?
➢ An important concept in cost accounting is that activities causes costs.
➢ Moving inventory is a non-value-added activity that causes costs (example: wages for employees and costs of equipment to move the goods)
➢ Reworking defective units is another common example of non-value-added activity.
Non-Value Added Activities
One of the most difficult tasks in calculating the financial consequences of alternatives is estiamting how costs (or revenues or assets) among the alternatives will differ.
Costs for Decision Making
- An organization of any but the smallest size divides responsibility for specific functions among its employees. These functions are grouped into organizational units. The units, which may be called departments, divisions, segments, or subsidiaries, specify the reporting relations within the firm. These relations are often shown on an organization chart.
- The organizational units can be based on products, geography, or business
function. We use the general term responsibility center to refer to these
units. The manager assigned to lead the unit is accountable for, that is, has
responsibility for, the unit’s operations and resources.
Costs for Control and Evaluation
- Each manager is responsible for the revenues and costs of his or her center. The Total Column is for the entire company. Note that the costs at the bottom of the income statement are not assigned to the centers; they are the costs of running the company. These costs are not the particular
responsibility of either Ray or Cathy. - Consider the other (administrative) costs. Carmen, not Ray or Cathy, is responsible for designing the administrative systems (e.g. accounting and
payroll), so she manages this cost as part of her responsibility to run the entire organization. Ray and Cathy, on the other hand, focus on managing
food and labor costs (other than their own salaries) and responsibility center revenues.
Responsibility Center
- Each responsibility center in an organization typically has a budget that is the financial plan for the revenues and resources needed to carry out its tasks and meet its financial goals.
- Budgeting helps managers decide whether their goals can be achieved and, if not, what modifications are necessary.
- Managers are responsible for achieving the targets set in the budget. The resources that a manager actually uses are compared with the amount budgeted to assess the responsibility center’s and manager’s performance.
Budgeting
➢As part of the planning and control process, managers prepare budgets containing expectations about revenues and costs for the coming period. At the end of the period, they compare actual results with the budgets. This allows them to see whether changes can be made to improve future operations.
Budgeting
- One principle of cost accounting is that different decisions often require
different cost data.
“One size fits all” does not apply to cost accounting. Each time you face a cost
information problem in your career, you should first learn how the data will be used. Are the data needed to value inventories in financial reports to
shareholders? Are they managers’ use in evaluating performance? Are the data to be used for decision making? The answers to these questions will guide your selection of the most appropriate accounting data.
Different Data for Different Decisions
- An important activity in product development is design. Product designers must write detailed specifications on a product’s design and manufacture. The design of a product can have a significant impact on the cost to manufacture it. Designs that are complex might add additional functions,
which, while making a product more desirable, may also require complex and expensive manufacturing processes. - Design for manufacturing (DFM) is the concept that manufacturing cost and complexity need to be considered in the design of the product. Cost accountants help designers understand the trade-off by using methods such as activitybased costing, which considers the activities or processes that will be required to bring a product to market.
- Hewlett-Packard, for example, uses activity-based costing methods to communicate to designers the costs of alternative designs of testing equipment.
Cost Accounting in Design
- Activity-based costing is a product costing method that has received a great deal of attention since the 1990s. This costing method is more detailed and complicated than conventional costing methods, but it can provide more accurate cost numbers.
- ABC assign costs to products based on several different activities, depending on how they drive costs, whereas traditional costing methods assign costs to products based on only one or two factors, generally based on volume. In general, ABC provides more detailed cost information, enabling managers to make more informed decisions.
Activity-Based Costing (ABC)
- Companies now partner with suppliers to increase the efficiency in the supply chain. Partnering requires information on the performance of partners to ensure the relationship adds value.
- Performance measures are being used to evaluate the performance of key suppliers and business partners. For example, United Technologies and Sun Microsystems both maintain extensive supplier metric systems. Sun Microsystems also includes an effort to “value” nonperformance in
understanding the effect of suppliers on Sun’s value.
Cost Accounting in Purchasing
- Managers measure a company’s own products, services, and activities against the best levels of performance that can be found either inside or
outside the manager’s own organization. Because managers seek continual improvement, they do not treat benchmarking as a one-time event but as an
ongoing process.
Benchmarking
- Operations managers and financial accountants use cost information in the production stage to understand and report the costs of the multiple
products produced. One of the most important developments in production, associated with lean manufacturing, is the use of just-in-time (JIT) methods. - Using JIT methods, companies produce or purchase units just in time for use, keeping inventories at a minimum. If inventories are low, accountants can spend less time on inventory valuation for external reporting and more time on managerial activities.
Cost Accounting in Production
- The economic justification for JIT comes from the trade-off between the costs of setup and stockouts as compared with the costs of holding inventory (obsolescence, storage space and associated tax and insurance, and
costs associated with organizing and keeping track of inventory). - Modern cost accounting systems have helped managers better understand the relative costs so that appropriate inventory policies can be set and targeted improvements sought.
JIT System
- Firms that use lean manufacturing techniques look to the cost accounting system to support these techniques by providing useful measurements at the work cell or process level. Lean accounting systems provide these
measures. In addition, these systems are designed to avoid unnecessary transactions, in effect eliminating “waste” from the accounting processes, just as lean manufacturing is designed to eliminate waste from the manufacturing process.
Lean Manufacturing System
- Marketing managers require cost accounting information to understand the profitability of different customer groups. Advances in accounting information systems that capture data at various levels of detail have made
possible customer relationship management (CRM), which allows firms to target more precisely those customers who are profitable by assessing the costs to serve a customer along with the revenues a customer generates.
Cost Accounting in Marketing
