Introduction to Cost Accounting

Chapter 1

Learning Objectives

Distinguish financial accounting from managerial

(1)
accounting

Understand how management accountants help firms

(2)
make strategic decisions
Describe the set of business functions in the value chain
(3) and identify the dimensions of performance that
customers are expecting of companies
Explain the five-step decision-making process and its
(4)
role in management accounting
Describe three guidelines management accountants
(5)
follow in supporting managers
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 ACCOUNTING

 The process of identifying, measuring and

communicating economic information about an
organisation, to facilitate informed judgements by users
of the information
 Identifying key financial components.
 Measuring the monetary values of these components in true
and fair manner.
 Communicating the information in ways useful to the users.

Balance sheet
Income statement
Statement of cash flows
3 Note of financial statement
Retained earnings

Managerial Accounting & Financial

Accounting

Managerial accounting Financial accounting

provides information provides information
for managers inside an to stockholders,
organization who creditors and others
direct and control who are outside
its operations. the organization.

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 Major Differences

Managerial Accounting Financial Accounting

Communicate financial
Purpose Decision making
position to outsiders

Primary Users Internal managers External users

Focus/Emphasis Future-oriented Past-oriented

Do not have to follow GAAP; GAAP compliant;

Rules
cost vs. benefit CPA audited
Ultra current to very long Historical monthly,
Time Span
time horizons quarterly reports
Behavioral Designed to influence Indirect effects on
Issues employee behavior employee behavior

Cost Accounting

 Cost accounting provides information for both

management accounting and financial accounting
professionals.
 Cost accounting is the process of measuring, analyzing,
and reporting financial and nonfinancial information
related to the costs of acquiring or using resources in an
organization.
 The distinction between management accounting and
cost accounting is not so clear-cut.

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 Strategy & Management Accounting

 Strategy – specifies how an organization create

value for its customers while distinguishing itself
from its competitors.
 Cost leadership strategy
 Product differentiation strategy
 Strategic Cost Management – focuses specifically
on the cost dimension within a firm’s overall strategy

Strategy & Management Accounting

 Management accounting helps answer important

questions such as:
 Who are our most important customers, and what critical
capability do we have to be competitive and deliver value
to them?
 What is the bargaining power of our customers?
 What is the bargaining power of our suppliers?
 What substitute products exist in the marketplace, and
how do they differ from our own?
 Will we have enough cash to support our strategy or will
we need to seek additional sources?

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 Management Accounting and Value

 Creating value is an important part of planning and

implementing strategy
 Value is the usefulness a customer gains from a
company’s product or service

Management Accounting and Value

 Value Chain is the sequence of business functions in

which customer usefulness is added to products or
services
 The Value-Chain consists of:
1. Research & Development
2. Design
3. Production
4. Marketing
5. Distribution
6. Customer Service

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 Different Parts of the Value Chain

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Exercise 1

Compaq Computer incurs the R&D Design Produc_ti Marketing Distribu_ Customer
following costs on tion service

a. Electricity costs for the plant

assembling the Presario computer

b. Transportation costs for

shipping the Presario to retail

c. Payment to Designer of Armada

Notebook

d. Salary of computer scientist

working on the next generation

e. Costs of Compaq employees’s

visit a major customer

f. Purchase of competitor’s
product for testing

g. Payment for TV advertisement

of Compaq

h. Cost of cable purchased for

Compaq printers

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 A Value Chain Implementation

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Key Success Factors

 The dimensions of performance that customers

expect, and that are key to the success of a
company include:
 Cost and efficiency
 Quality
 Time
 Innovation
 Sustainability

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 Exercise 2

1-20. Key success factors, Vortex Consulting has issued a report recommending
changes for its newest high-tech manufacturing client, Precision Instruments.
Precision instruments currently manufactures a single product, a surgical robot
that is sold and distributed internationally. The report contains the following
suggestiongs for enchancing business performance. Link each o these changes
to the key success factors that are important to managers.
Cost & Quality Time Innovation Sustain
Efficiency

TQM: total a. Develop a more advanced cutting

tool to stay ahead of competitors
quality b. Adopt a TQM philosophy to reduce
management waste and defects
c. Reduce leadtimes by 20% in order
CSR: Corporate to increase customer retention
d. Redesign the robot to use 25% less
social energy as CSR objectives
responsibility e. Benchmark the company’s gross
margin percentages again competitors

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05 Steps in Planning & Control

• Identify the problem and uncertainties

Step 1

• Obtain information
Step 2
Planning
• Make predictions about the future
Step 3

• Make decisions by choosing between

Step 4 alternatives

• Implement the decision, evaluate performance,

Control Step 5 and learn

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 05 Steps in Planning & Control

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 Exercise 3

1-25. Brook Exteriors is a firm that provides house painting services. Richard Brook, the owner, is trying to find new ways to
increase revenues. Mr. Brook performs the following actions, not in the order listed. Classify each of the actions (a–f)
according to its step in the five-step decision-making process.
identify prob. obtain inf. predict decide implement &learn
a. Mr. Brook decides to buy the paint sprayers
rather than hire additional painters.
b. Mr. Brook discusses with his employees the
possibility of using paint sprayers instead of hand
painting to increase productivity and thus profits.
c. Mr. Brook learns of a large potential job that
is about to go out for bids.
d. Mr. Brook compares the expected cost of
buying sprayers to the expected cost of hiring
more workers who paint by hand and estimates
profits from both alternatives.
e. Mr. Brook estimates that using sprayers will
reduce painting time by 20%.
f. Mr. Brook researches the price of paint
sprayers online.

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Key Management Accounting

Guidelines
 Cost – Benefit approach is commonly used: benefits
generally must exceed costs as a basic decision rule
 Behavioral & Technical Considerations – people are
involved in decisions, not just dollars and cents
 Different definitions of cost may be used for different
applications
Cost of manufactured=
open WIP (cost of work in progress)
+ manufactured overhead

chi phí sản phẩm dở dang+ chi phí sản xuất chung

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 Exercise 4

1-32 Management accounting guidelines. For each of the following items, identify which of the management
accounting guidelines applies.
behavioral and different costs
cost–benefit technical for different
approach considerations purposes
1. Analyzing whether to avail an export order for which overtime
payments are required.
2. Deciding on a short-term shutdown of a factory because of
the lack of demand for products due to the seasonal factor. The
short-term shutdown may save some overhead costs, but will
result in incurring compensations to the retrenched workers.
3. Considering whether to charge the heavy repairs made to the
factory premises as an expense for financial reporting purposes
or capitalizing and expensing them over a longer period for
management performance-evaluation purposes.
4. Deciding to impose supervisory control to limit the wastage of
materials.
5. Considering introducing a performance bonus scheme to
increase the productivity of employees.
6. Analyzing whether to increase the production capacity to
meet the growing demands for products.
7. Contemplating changing the production process to save
production time resulting in increased production.

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Organizational Structure &

Management Accountant

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 Exercise 5

George Perez is the controller at Allied Electronics, a manufacturer of devices for the
computer industry. He is being considered for a promotion to chief financial officer.
In this table, indicate which executive is primarily responsible for each activity. Required
Activity Controller CFO

Managing accounts payable

Communicating with investors
Strategic review of different lines of businesses
Budgeting funds for a plant upgrade
Managing the company’s short-term investments
Negotiating fees with auditors
Assessing profitability of various products
Evaluating the costs and benefits of a new product design
Based on this table and your understanding of the two roles, what types of training or
experiences will George find most useful for the CFO position?

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Professional Ethics

 The four standards of ethical conduct for

management accountants as advanced by the
Institute of Management Accountants:
 Competence
 Confidentiality
 Integrity
 Credibility

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Learning Materials

 Chapter 1 (Horngren’s Cost Accounting)

 Excersices 1-17, 1-18, 1-19, 1-20, 1-22, 1-25, 1-18, 1-30,
1-32

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