Chapter 01 – Cost Accounting: Information for Decision Making
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• As seen in Exhibit 1.4, the managers of the retail and the wholesale operations are
responsible for their own Center Margin, the difference between revenues and costs
attributable to a center. The general and administrative costs of running the company as a
whole are the responsibility of the general manager and are not assigned to the
department managers.
• A budget shows a financial plan of the revenues and resources needed to carry out the
responsibility center’s tasks and meet financial goals.
• Managers are committed to the targets set in the budget as part of the planning process.
Later, a comparison of actual results with the budget at the end of each period determines
whether managers fulfill their responsibilities and whether changes can be made to
improve future operations.
• Exhibit 1.5 demonstrates budget versus actual results for a responsibility center.
♦ Cost accounting requires different accounting data for different decision purposes. “One size
fits all” does not apply to cost accounting.
LO4 Identify current trends in cost accounting.
♦ Cost accounting undergoes dynamic changes over time to accommodate shifting managerial
emphases and decision contexts in all stages of the value chain, from research and development
(R&D), design, purchasing, production, marketing, distribution, all the way to customer service.
• In the development stage, companies partner with suppliers to ensure cost-efficient
designs and materials for products.
• Design for manufacturing (DFM) is the concept that manufacturing cost and complexity
need to be considered in the design of the product.
• The tradeoff between complex design for a more desirable product and difficult and
expensive manufacturing process can be manifested through cost accounting methods
such as activity-based costing (ABC) – a costing method that first assigns costs to
activities and then assigns them to products based on the products’ consumption of
activities.
• Activity-based costing provides more detailed and accurate cost information than
traditional costing methods and enables managers to make more informed decisions,
leading to activity-based management that identifies and eliminates nonvalue-added
activities.
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• In purchasing, performance measures (metrics that indicates how well an individual,
business unit, product, or firm is working) are used to evaluate performance of key
suppliers and business partners.
• Benchmarking is the continuous process of measuring a company’s own products,
services, and activities against best practices either inside or outside the organization.
Continuous improvement sets the performance standard ever higher to achieve better
results throughout the supply chain.
• Just-in-time (JIT) method may be used in production or purchasing where each unit is
purchased or produced just in time for its use. Cost accountants develop unique treatment
for the just-in-time environment while deemphasizing the need for inventory valuation.
• Lean accounting is a cost accounting system that provides measures at the work cell or
process level and minimizes wasteful or unnecessary transaction processes. Lean
accounting provides support for lean manufacturing techniques.
• Customer relationship management (CRM) is a system that allows firms to target
customers by assessing customer revenues and costs. Marketing managers use cost
accounting data to better manage different customer groups based on their profitability.
• In the distribution stage, managers frequently consider activities for outsourcing, with
which one or more of the firm’s activities will be performed by another firm or individual
in the supply or distribution chain for improved efficiency and cost savings.
• Total quality management (TQM) is a management method by which the
organization seeks to excel on all dimensions, with the customer ultimately defining
quality.
• Cost of quality (COQ) is a system that identifies the costs associated with producing
low quality items, including rework, returns, and lost sales.
• Enterprise resource planning (ERP) systems represent the information technology
that links the various systems of the enterprise into a single comprehensive information
system. By integrating purchasing, production, human resources, and finance, managers
hope to avoid lost orders, duplication of effort, and costly studies to determine what the
current state of the enterprise is.
• All these tools are meant to add value to the organization. They also provide
opportunities for people interested in cost accounting to contribute to the organization.
♦ As shown in Exhibit 1.6, key financial managers in an organization and their activities include:
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• Chief financial officer (CFO): The top financial personnel and usually a senior vice
president; in charge of the entire accounting and finance function of a company.
• Treasurer: The person responsible for managing liquid assets (such as cash and short-
term investments); conducting business with banks and other financial institutions;
overseeing public issues of stock and debt.
• Controller: The person in charge of accounting functions, including planning, decision
making, designing information systems and incentive systems, and helping managers
make operating decisions.
• Internal auditors: Part of an internal audit department that ensures compliance with laws,
regulations, and company policies and procedures; provides consulting and auditing
services within the firm; also assists external auditors examining external financial
reports and reviewing companies’ internal control systems; often reports directly to the
audit committee of the Board of Directors as “whistleblowers.”
• Cost accountants: A group of people who record, measure, determine, and analyze costs;
work with financial and operational managers to provide relevant information for
decisions.
♦ People from engineering, production, marketing, finance, and accounting often work together
in cross-functional teams to solve problems.
• Value is added by
(1) bringing a variety of expertise and perspectives to a problem,
(2) ensuring that the product is appropriate for its customer base,
(3) giving production a chance to formulate an efficient production process,
(4) obtaining financing for the project, and
(5) determining whether the project is economically feasible.
LO5 Understand ethical issues faced by accountants and ways to deal with
ethical problems that you face in your career.
♦ Cost assignment to activities, products, projects, corporate units, and people, as the result of
the design of cost systems, affects price, reimbursement, and pay, among others. It has the
potential to be misused to defraud customers, employees, or shareholders.
♦ Accounting information is used to evaluate the performance of managers. Accountants who
prepare the numbers are under constant pressure to make accounting choices that will influence
performance reports.
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• Both the preparers and users of cost information need to be aware of the incentives
created by performance measurement systems and how those incentives may lead to
unethical (or even illegal) conduct.
• Professional organizations such as the Institute of Management Accountants (IMA),
Institute of Internal Auditors (IIA) and the American Institute of Certified Public
Accountants (AICPA) have developed codes of ethics to help their members maintain the
highest levels of ethical conducts and resolve ethical dilemmas. Many businesses also use
these codes to train their employees and to demonstrate their commitment to certain
business practices with respect to their customers and as a guide for their employees.
• The Appendix to this chapter shows the IMA code of ethics in detail. Members of the
IMA are expected to maintain an appropriate level of professional competence, refrain
from disclosing confidential information acquired in the course of their work, and
maintain integrity and objectivity in their work. Any resolution of ethical conflict should
follow the established policies of the organization. Suitable courses of action are also
recommended if the policies do not resolve the ethical conflict.
• The IMA code of ethics discusses the steps cost accountants should take when faced
with an ethical conflict, including
(1) discuss the conflict with the immediate superior, or, if the conflict involves the
superior, the next level in authority,
(2) clarify the relevant issues and concepts by discussions with a disinterested party, and
(3) consult an attorney about rights and obligations.
♦ Congress passed the Sarbanes-Oxley Act of 2002 to counter many illegal practices, including
manipulation of accounting results, designed to increase the compensation of managers at the
expense of the investing and consuming public.
• Provisions in Title III and IV of the Act deal with corporate responsibility and enhanced
financial disclosure, respectively.
• The CEO and CFO are responsible for signing financial statements and stipulating that
the financial statements do not omit material information.
• The CEO and CFO must further disclose that they have evaluated the company’s
internal controls and that they have notified the company’s auditors and the audit
committee of the board of any fraud that involves management.
• Section 404 of Title IV requires managers to attest to the adequacy of their internal
controls.
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• The Sarbanes-Oxley Act of 2002 has important implications for managers who design
cost information systems. The managers must be aware of the potential for the resulting
information to be misleading or to further fraudulent activity. See In Action box for a
discussion of options backdating at Apple, Inc. and its pitfalls.
♦ Cost accounting information interacts with other business disciplines in the organization to
solve problems. Cost accounting system permeates the organization and influences a myriad of
decisions. A good grasp of other disciplines such as organizational behavior and marketing will
help enrich the study of cost accounting.
Matching
A.
Benchmarking
G.
Enterprise resource planning
B.
Cost accounting
H.
Just-in-time method
C.
Cost-benefit analysis
I.
Outsourcing
D.
Cost driver
J.
Responsibility center
E.
Differential revenues
K.
Supply chain
F.
Distribution chain
L.
Value chain
_____ 1. The set of activities that transforms raw resources into the goods and services end
users purchase and consume, and includes the treatment or disposal of any waste
generated by the end users.
_____ 2. The field of accounting that measures, records, and reports information about costs.
_____ 3. Factor that causes, or “drives,” costs.
_____ 4. The set of firms and individuals that buy and distribute goods and services from the
firm.
_____ 5. A specific unit of an organization assigned to a manager who is held accountable for
its operations and resources.
_____ 6. The continuous process of measuring a company’s own products, services, and
activities against best practices either inside or outside the organization.
_____ 7. May be used in production or purchasing where each unit is purchased or produced
just in time for its use.
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_____ 8. Represents the information technology that links the various systems of the enterprise
into a single comprehensive information system.
_____ 9. One or more of the firm’s activities will be performed by another firm or individual in
the supply or distribution chain for improved efficiency and cost savings.
_____ 10. Revenues that change in response to a particular course of action.
_____ 11. The process of comparing benefits (often measured in savings or increased profits)
with costs associated with a proposed change within an organization.
_____ 12. The set of firms and individuals that sell goods and services to the firm.
Answers
1. L
2. B
3. D
4. F
5. J
6. A
7. H
8. G
9. I
10. E
11. C
12. K
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Multiple Choice
1. Cost accounting
a. Provides information to managers for decision making.
b. Information is not comparable across organizations.
c. Is not based on GAAP.
d. All of the above.
2. Cost accounting system
a. Adds value to the organization.
b. Is part of Enterprise Resource Planning (ERP) systems.
c. Is beyond any ethical issues.
d. Both a and b.
3. Which of the following positions/functions is not under the supervision of the Chief
Financial Officer (CFO)?
a. Treasurer.
b. Controller.
c. Human resources.
d. Cost accountants.
4. Which of the following statements is correct?
a. All activities add value to the organization.
b. All value chain functions are within the organization.
c. Supply chain and value chain do not overlap.
d. Cost information reduces value.
5. In cost-benefit analysis,
a. Benefits are often measured in savings or increased profits.
b. Proposed changes within the organizational structure are evaluated.
c. Benefits should outweigh costs to be acceptable.
d. All of the above.
6. Cost drivers
a. Are factors that drive costs.
b. Are activities that consume resources in Activity-Based Costing (ABC).
c. Are few in traditional costing systems.
d. All of the above.
The following information is for questions 7 – 8.
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Company A’s quarterly sales revenue and operating costs are $12,000 and $9,500, respectively.
Operating costs include $1,500 of leasing charge for computers. A new product line will increase
sales revenue by 30 percent and costs (other than the leasing charge which remains unchanged)
by 35 percent.
7. If Company A includes the new product line,
a. Sales revenue will increase by $3,200.
b. Operating costs will increase to $12,300.
c. Operating profits will increase by $1,100.
d. Operating costs are not relevant.
8. The leasing charge
a. Is differential.
b. Is relevant to the decision.
c. Plays no role in the decision.
d. Will not change in the future.
9. New trends in cost accounting include
a. Just-in-time method.
b. Total quality management.
c. Benchmarking and continuous improvement.
d. All of the above.
10. Ethical conflicts in cost accounting
a. Are governed by the code of ethics of the professional organizations.
b. Will not have implications for cost accountants’ decisions.
c. Should be resolved to meet the demands of managers.
d. Will never lead to resignation of cost accountants.
11. Financial statements for external users are characterized as
a. User-specific.
b. Managerial reports.
c. General-purpose.
d. Not consistent with GAAP.
12. Which of the following statements is correct?
a. Design for manufacturability is not compatible with activity-based costing.
b. Performance of key suppliers and business partners must be constantly evaluated.
c. Cost of quality is a system that identifies the costs of producing high quality items.
d. Enterprise resource planning system duplicates the effort and costs of stand-alone
systems.
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Answers
1. d LO1
2. d LO1
3. c LO4
4. b LO1
5. d LO1
6. d LO2, LO3
7. b LO3
Sales revenue increase = $12,000 × 30% = $3,600.
Operating cost increase = ($9,500 – $1,500) × 35% = $2,800.
Operating cost = $9,500 + $2,800 = $12,300.
Operating profit increase = $3,600 – $2,800 = $800.
8. c LO3
9. d LO4
10. a LO5
11. c LO2
12. b LO4