Learning Objectives
1. What are the relationships among financial, management, and cost accounting?
2. What are the sources of authoritative pronouncements for the practice of cost accounting?
3. What is a mission statement, and why is it important to organizational strategy?
perform effectively in that organization?
5. What is a value chain, and what are the major value chain functions?
INTRODUCTION TO COST ACCOUNTING
CHAPTER
1
Chapter 01: Introduction to Cost Accounting IM 2
Terminology
Authority: The right (usually by virtue of position or rank) to use resources to accomplish a task or
achieve an objective
Balanced scorecard: A framework that restates an organization’s strategy into clear and objective
Competence: Professional ethics standard that requires professionals to develop and maintain the skills
Confidentiality: Professional ethics standard that requires professionals to refrain from disclosing
Core competency: Any critical function or activity in which an organization seeks a higher proficiency
Cost accounting: A discipline that addresses the demands of both financial and management
accounting by providing product cost information to (1) external parties (stockholders, creditors, and
Cost leadership: A company’s ability to maintain its competitive advantage by undercutting competitor
prices
Credibility: Professional ethics standard that requires individuals to provide full, fair, and timely
Customer value perspective: The balanced scorecard perspective that addresses how well the
Downstream cost: Costs such as marketing, distribution, and customer service which are typically
Earnings management: The act of using accounting methods or practices to deliberately “adjust” a
Environmental constraint: any limitation caused by external cultural, fiscal (such as taxation structures),
Financial performance perspective: The balanced scorecard perspective that addresses the concerns
Integrity: Professional ethics standard that prohibits individuals from participating in activities that would
Intellectual capital: All of the intangible assets contained in an organization, including knowledge, skills,
Chapter 01: Introduction to Cost Accounting IM 3
Internal business perspective: The balanced scorecard perspective that addresses those things that
Lag indicator: Historical financial data or other outcomes resulting from past actions, such as installing a
Lead indicator: Future financial and non-financial outcomes including opportunities and problems that
Learning and growth perspective: The balanced scorecard perspective that focuses on using the
Line personnel: Employees who work directly toward attaining organizational goals. Line personnel
Management accounting: That part of accounting that is concerned with providing information to parties
Mission statement: A written expression of organizational purpose that describes how the organization
Organizational structure: Reflects the way in which authority and responsibility for making decisions is
Product Cost: The sum of the costs incurred within the factory to make one unit of product
Product differentiation: A company’s ability to offer superior quality products or more unique services
Responsibility: The obligation to accomplish a task or achieve an objective
Return on investment (ROI): A measure calculated as net income divided by total assets which was
Staff personnel: Employees who give assistance and advice to line personnel; examples include
Upstream cost: Costs such as research and development and product design which are typically
Value chain: The set of value-adding functions or processes that convert inputs into products and
Chapter 01: Introduction to Cost Accounting IM 4
Lecture Outline
LO.1 What are the relationships among financial, management, and cost accounting?
A. Introduction
1. This chapter compares financial, management, and cost accounting, introduces the
B. Comparison of Financial, Management, and Cost Accounting
1. Financial Accounting
a. The objective of financial accounting is to provide useful information to external users of
financial statements including investors and creditors.
i. Publicly traded companies are required to have their financial statements audited by an
independent auditing firm.
corporate managers.
d. In the early 1900s, financial accounting was the dominant source of information for evaluating
business operations.
managed/owned by a small number of people.
ii. As the securities market grew, so did the demand for audited financial statements.
2. Management Accounting
a. Management accounting comprises the financial and nonfinancial information needed by
internal users (i.e., managers).
Chapter 01: Introduction to Cost Accounting IM 5
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
i. Managers are concerned with fulfilling corporate goals, communicating and implementing
strategy, and coordinating product design, production, and marketing while
simultaneously running distinct business segments.
b. Management accounting information is not required to adhere to GAAP and thus can provide
both historical and forward-looking information to managers.
i. Management accounting information commonly addresses individual or divisional
environment.
i. Trying to manage by using only financial reporting information often created dysfunctional
ii. The differences between financial and management accounting are summarized in text
Exhibit 1.1 (p. 3).
downstream costs.
i. When making pricing decisions, managers needed to add these upstream and
downstream costs to the GAAP-determined product cost as illustrated in Exhibit 1.2 (p.
4).
Upstream costs are costs such as research and development and product design
3. Cost Accounting
a. Cost accounting information addresses the demands of both financial and management
company or nonprofit organization to provide a given service.
Chapter 01: Introduction to Cost Accounting IM 6
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
ii. Cost accounting supports the management accounting system by providing product and
service cost information to internal managers who are responsible for planning,
controlling, decision making, and evaluating performance.
For internal reporting purposes, product and service cost information can be
b. As companies expanded operations, managers recognized that a single cost could no longer
be computed for a product or service.
financial accounting measures.
LO.2 What are the sources of authoritative pronouncements for the practice of cost accounting?
C. Cost Accounting Standards
1. The Institute of Management Accountants (IMA)
accounting.
that ensures wide support.
2. The Society of Management Accountants of Canada (CMA-Canada)
3. The Cost Accounting Standards Board (CASB)
b. The CASB produced 20 cost accounting standards (one of which has been withdrawn) from
its inception until it was terminated in 1980.
d. CASB standards do not constitute a comprehensive set of rules, but compliance is required
4. No official agency publishes generic management accounting standards for all companies.
a. Although the IMA, CMA-Canada, and CASB have been instrumental in standards
Chapter 01: Introduction to Cost Accounting IM 7
publicly accessible website, in whole or in part.
LO.3 What is a mission statement and why is it important to organizational strategy?
D. Compteting in a Global Environment
1. General
a. A mission statement expresses the purposes for which the organization (whether for-profit
b. Mission statements are used to develop the organization’s strategy or plan of how the firm
2. Organizational Strategy (see text Exhibit 1.4 (p. 6))
advantage.
b. Most companies compete using either a “cost leadership” or “product differentiation” strategy.
i. Cost leadership refers to a company’s ability to maintain its competitive edge by
c. Cost accountants gather financial and nonfinancial information to help management achieve
E. Organizational Structure
1. An organization is composed of people, resources other than people, and commitments that are
decisions are distributed in an organization.
a. Authority refers to the right (usually by virtue of position or rank) to use resources to
3. Work in organizations is directed by line personnel who work directly toward attaining
a. The treasurer is generally responsible for achieving short– and long-term financing, investing,