Lesson 1 Cost Accounting and Controlling Flashcards
1
Q
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
.
A
Value Chain
2
Q
Those that customers perceive as adding
utility to the goods or services they
purchase
.
A
Value -Added Activities
3
Q
- Firms buy resources from suppliers (other companies,
employees, etc .) These suppliers form the supply chain for the firm.
A
Supply Chain and Distribution Chain
4
Q
- 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.
A
Accounting and the Value Chain
5
Q
- 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
A
Financial Accounting
6
Q
- Information is designed for managers.
- Internal users only
- Doesn’t need to comply with GAAP and PFRS
- Both historical and future-oriented data
A
Cost Accounting
7
Q
- 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.
A
The Manager’s Job
8
Q
➢ 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.
A
Non-Value Added Activities
9
Q
One of the most difficult tasks in calculating the financial consequences of alternatives is estimating how costs (or revenues or assets) among the alternatives will differ.
A
Costs for Decision-Making
10
Q
- 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.
A
Costs for Control
and Evaluation
11
Q
- 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.
A
Responsibility Center
12
Q
- 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.
A
Budgeting
13
Q
➢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.
A
Budgeting
14
Q
- 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.
A
Different Data for Different Decisions
15
Q
- 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.
A
Cost Accounting in Design
16
Q
- 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.
A
Activity-Based Costing (ABC)
17
Q
- 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.
A
Cost Accounting in Purchasing
18
Q
- The use of cost accounting methods such as target
costing, activity-based costing, performance
measures, and incentive systems that support
teamwork, helps firms such as FedEx and Dell Inc.
manage their partnerships to keep the supply chain
“lean” and add value throughout the chain. - Some firms, for example, Sainsbury, a supermarket
chain in the United Kingdom, maintain a Web portal
for their suppliers that allows them to see their own
performance over time and compare it to the
average performance of other comparable
suppliers. In the United States, Boeing aircraft and
United Technologies also use the Internet to provide
comparative performance data to suppliers.
A
Cost Accounting in Purchasing
19
Q
- Some firms, for example, Sainsbury, a supermarket
chain in the United Kingdom, maintain a Web portal
for their suppliers that allows them to see their own
performance over time and compare it to the
average performance of other comparable
suppliers. In the United States, Boeing aircraft and
United Technologies also use the Internet to provide
comparative performance data to suppliers. - These approaches to managing suppliers allow firms
to support continual improvement throughout the
supply chain by facilitating** benchmarking.**
A
Cost Accounting in Purchasing
20
Q
- 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.
A
Benchmarking
21
Q
- 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.
A
Cost Accounting in Production
22
Q
- 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.
A
JIT System
23
Q
- 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.
A
Lean Manufacturing System
24
Q
- 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. - For example, Harrah’s Entertainment is able to compete
on the basis of providing complimentary services to
customers (typically called “comping”) based on their
expected personal profitability.
A
Cost Accounting in Marketing
