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Chapter 1 Book notes- MGA 314

by: Kristina Goehringer

Chapter 1 Book notes- MGA 314 24943

Marketplace > University at Buffalo > Accounting > 24943 > Chapter 1 Book notes MGA 314
Kristina Goehringer
GPA 3.6
Cost Accounting
Kathleen Nesper

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Chapter 1 Book notes for MGA 314- all vocab words and terms are clearly defined.
Cost Accounting
Kathleen Nesper
Class Notes
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This 6 page Class Notes was uploaded by Kristina Goehringer on Wednesday October 8, 2014. The Class Notes belongs to 24943 at University at Buffalo taught by Kathleen Nesper in Fall2014. Since its upload, it has received 95 views. For similar materials see Cost Accounting in Accounting at University at Buffalo.


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Date Created: 10/08/14
CHAPTER ONE COST ACCOUNTING INFORMATION FOR DECISION MAKING Value Creation in Organizations o Value Chain o Value Chain Linked set of activities that increases the usefulness or value of the goods or services of an organization It also includes the treatment or disposal of any waste generated by the end users An important objective of modern cost accounting is to ensure that the entire value chain is as efficient as possible It is necessary for the firm to coordinate with vendors and suppliers and with distributors and customers to achieve this objective o Value Added Chain Those activities that customers perceive as adding utility to the goods or services they purchase The value chain comprises activities from research and development through the production process to customer service Managers evaluate these activities to determine how they contribute to the final product39s service quality and cost Most organizations operate under the assumption that each of the value chain components adds value to the product or service Before product ideas are formulated no value exists Once an idea is established however value is created When research and development of the product begins value increases As the product reaches the design phase value continues to increase Each component adds value to the product or service Administrative functions are not included as part of the value chain They are included instead in every business function of the value chain Many administrative areas cover each value chain business function o Supply Chain amp Distribution Chain o Supply Chain Linked set of firms that exchange goods or services in combination to provide a final product or service to the consumer o Distribution Chain Set of firms and individuals that buys and distributes goods and services from the firm o Supply chain and distribution chain are the parts of the value chain outside the firm o The value chain is important because it creates the value for which the customer is willing to pay The customer is not particularly concerned with how work is divided among firms producing the product or providing the service Therefore one decision firms must make is where in the value chain a value added component is performed most cost effectively Accounting Systems o Financial Accounting Field of accounting that reports financial position and income according to accounting rules o These users of the information are often external to the firm The information at least for firms that are publicly traded is public and typically available on the company39s Web site The managers in the company are keenly interested in the information contained in the financial accounting reports generated However the information is not sufficient for making operational decisions o An important characteristic of financial accounting data is that it be comparable across firms As a result financial accounting systems are characterized by a set of rules that define how transactions will be treated Cost Accounting Field of accounting that measures records and reports information about costs o Because the managers are making decisions only for their own organization there is no need for the information to be comparable to similar information in other organizations Instead the important criterion is that the information be relevant for the decisions that managers operating in a particular business environment with a particular strategy make Cost accounting information is commonly used in financial accounting information but we are concerned primarily with its use by managers to make decisions Cost Accounting GAAP and IFRS o Generally Accepted Accounting PrinciplesGAAP Rules standards and conventions that guide the preparation of financial accounting statements for shareholders o International Financial Reporting Standards IFRS Rules standards and conventions that guide the preparation of the financial accounting statements in many other countries GAAP and IFRS provide consistency in the accounting data used for reporting purposes from one company to the next This means that the cost accounting information used to compute cost of goods sold inventory values and other financial accounting information used for external reporting must be prepared in accordance with GAAP or IFRS Although GAAP and IFRS are converging differences remain In contrast to cost data for financial reporting to shareholders cost data for managerial use that is within the organization need not comply with GAAP or IFRS Management is free to set its own definitions for cost information Indeed the accounting data used for external reporting are often entirely inappropriate for managerial decision making For example managerial decisions deal with the future so estimates of future costs are more valuable for decision making than are the historical and current costs that are reported externally Unless we state otherwise we assume that the cost information is being developed for internal use by managers and does not have to comply with GAAP or IFRS Our Framework for Assessing Cost Accounting Systems Non Value Added Activities Activities that do not add value to the good or service An important concept in cost accounting is that activities cause costs Moving inventory is a nonvaue added activity that causes costs for example wages for employees and costs of equipment to move the goods Reworking defective units is another common example of a nonvaue added activity In general if activities that do not add value to the company can be eliminated then costs associated with them will also be eliminated Cost Benefit Analysis Process of comparing benefits often measured in savings or increased profits with costs associated with a proposed change within an organization Managers should perform cost benefit analyses to assess whether proposed changes in an organization are worthwhile The concept of cost benefit analysis applies equally to deciding whether to implement a new cost accounting system The benefits from an improved cost accounting system come from better decision making If the benefits do not exceed the cost of implementing and maintaining the new system managers will not implement it o if a company can eliminate nonvaue added activities it can reduce costs without reducing the value of the product to customers By reducing costs the company can lower the price it charges customers giving it a cost advantage over competitors Or the company can use the resources saved from eliminating nonvaue added activities to provide better service to customers Cost Data for Managerial Decisions o Cost Drivers Factor that causes or drives costs o Differential Costs With two or more alternatives costs that differ among or between alternatives o Differential Revenues Revenues that change in response to a particular course of action o Responsibility Center Specific unit of an organization assigned to a manager who is held accountable for its operations and resources o Each responsibility center in an organization typically has a budget that is its 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 o Budget Financial plan of the resources needed to carry out activities and meet financial goals Trends in Cost Accounting throughout the Value Chain o Cost Accounting in Research and Development RampD o Companies partner with suppliers in the development stage to ensure cost effective designs for products Product engineers need cost accounting information to make decisions about alternative materials o Cost Accounting in Design o An important activity in product development is design Product designers must write detailed specifications on a product39s 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 activity based costing which considers the activities or processes that will be required to bring a product to market Hewett Packard for example uses activity based costing methods to communicate to designers the costs of alternative designs of testing equipment o Activity Based Costing ABC Costing method that first assigns costs to activities and then assigns them to products based on the products consumption of activities o ABC assigns 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 o Cost Accounting in Purchasing o 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 o Performance Measures Metric that indicates how well an individual business unit product firm and so on is working O 0 Using benchmarking methods managers measure a company39s own products services and activities against the best levels of performance that can be found either inside or outside the manager39s own organization Because managers seek continual improvement they do not treat benchmarking as a one time event but as an ongoing process Benchmarking Continuous process of measuring a company39s own products services or activities against competitors performance o Cost Accounting in Production 0 Using just in time 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 The economic justification for JIT comes from the trade off between the costs of setup and stock outs 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 JustInTime JIT Method In production or purchasing each unit is purchased or produced just in time for its use 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 Accounting A cost accounting system that provides measures at the work cell or process level designed around the value chains of major products and services to support lean manufacturing o Cost Accounting in Marketing 0 0 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 Customer Relationship Management CRM System that allows firms to target profitable customers by assessing customer revenues and costs o Cost Accounting in Distribution 0 Managers use accounting information to determine where in the supply chain value added activities will take place Cost accountants work with managers to estimate whether it is more efficient less costly to perform an activity in the firm or to have another firm produce the product or perform the service This is referred to as outsourcing Firms frequently consider activities in the distribution stage for outsourcing As business becomes more global specialized information on markets regulations and customs is critical to the speed of delivery As a result cost information often identifies specialized companies as being more efficient in distributing products as opposed to handling distribution internally Outsourcing Having one or more of the firm39s activities performed by another firm or individual in the supply or distribution chain 4 Cost Accounting in Customer Service 0 Many companies have adopted the concept of total quality management TQM which means that the organization is managed to excel on all dimensions and the customer ultimately defines quality The customers determine the company39s performance standards according to what is important to them which is not necessarily what is important to product engineers accountants or marketers Companies can indicate the high quality to consumers through the product warranty Cost accountants help managers make decisions about quality in two ways First cost of quality WOO systems identify the costs associated with producing defective units as well as the lost sales associated with poorquality products Second they provide information on the projected warranty claims which can be compared to the increase in revenues estimated from offering a longer or more comprehensive warranty 0 Total Quality Management TQM Management method by which the organization seeks to excel on all dimensions with the customer ultimately defining quality 0 Cost Of Quality COO System that identifies the costs of producing low quality items including rework returns and lost sales o Enterprise Resource Planning As the cost of information technology falls and the value of information increases managers have adopted enterprise resource planning ERP systems a ERP systems are integrated information systems that link various activities in an organization Typical systems include modules for production purchasing human resources and finance By integrating these systems managers hope to avoid lost orders duplication of effort and costly studies to determine what is the current state of the enterprise o Because all of the company39s systems are integrated the potential for ERP to provide information on costs of products and services is large Implementation problems and the scale of the task in large firms enterprises have kept many companies from realizing that potential so far a However with the increased emphasis on internal control from the SarbanesOxley Act ERP systems will become even more valuable o Enterprise Resource Planning ERP Information technology that links the various systems of the enterprise into a single comprehensive information system Key Financial Players in Organization Major Responsibilities and Title Primary Duties Example Activities Chief financial officer CFO Treasurer Controller 0 Internal auditor Cost accountant Manages entire finance and accounting function Manages liquid assets Conducts business with banks and other financial institutions Oversees public issues of stock and debt Plans and designs information and incentive systems Ensures compliance with laws regulations and company policies and procedures Provides consulting and auditing services within the firm Records measures estimates and analyzes costs Works with financial and opera tional manager to provide relevant information for decisions Signs off on financial statements Determines policy on debt versus equity financing Determines where to invest cash balances Obtains lines of credit Determines cost accounting policies Maintains the accounting records Ensures that procurement rules are followed Recommends policies and procedures to reduce inventory losses Evaluates costs of products and processes Recommends costeffective methods to distribute products Choices Ethical Issues for Accountants Accountants report information that can have a substantial impact on the careers of managers Managers are generally held accountable for achieving financial performance targets Failure to achieve them can have serious negative consequences for the managers including losing their jobs If a division or company is having trouble achieving financial performance targets accountants may find themselves under pressure by management to make accounting choices that will improve performance reports The Sarbanes Oxley Act of 2002 and Ethics o Some of the important provisions concern those in Title III and Title IV that 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 requirement that these officers sign the company39s financial statements makes it clear that the buck stops with the CEO and CFO and that they are personally responsible for the financial statements They cannot legitimately claim that lowerlevel managers or employees misled them about the financial statements as was stated by defendant executives in many fraud trials in the past We have learned that top executives are taking this sign off very seriously especially knowing that misrepresentation of their company39s financial reports could mean substantial prison time They must further disclose that they have evaluated the company39s internal controls and that they have notified the company39s auditors and the audit committee of the board of any fraud that involves management o Section 404 of Title IV requires managers to attest to the adequacy of their internal controls Good internal controls assure that financial records accurately and fairly reflect transactions and that expenditures are in accordance with the authorization of company management and directors Further good internal controls help protect against the unauthorized purchase use or sale of company assets


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