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Information for Decision Making. Chapter 1. Describe the way managers use accounting information to create value in organizations. Explain how cost accounting information is used for decision making and performance evaluation in organizations.

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slide2

Describe the way managers use accounting information to create value in organizations.

  • Explain how cost accounting information is used for decision making and performance evaluation in organizations.
  • Distinguish between the uses and users of cost accounting and financial accounting information.
  • Identify current trends in cost accounting.
  • Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.

Learning Objectives

value chain

L.O. 1 Describe how managers use accounting information to create value in organizations.

The value chain describes the activities that increase the value of an organization’s products or services.

Customer

Service

Value Chain

Production

Marketing

R&D

Distribution

Design

activities

Does this add value?

Value Added Activity: Customers perceive as adding value.

Non Value-Added Activity: Customers perceive no value.

Customer

Evaluate each activity

service

Activities

Production

Marketing

R&D

Distribution

Design

Non Value-Added Activity: Customers perceive no value.

Value Added Activity: Customers perceive as adding value.

Does this add value?

Hmmmm…?

Can we improve the activity?

Can we eliminate the activity?

value chain1

Research and Development

R&D

Value-Added

Non Value-Added

Creating a new product.

Value Chain

?

or

value chain2

Design

Value-Added

Non Value-Added

Developing and engineering the new product.

Value Chain

?

or

value chain3

Production

Value-Added

Non Value-Added

Producing the product.

Value Chain

?

or

value chain4

Marketing

Value-Added

Non Value-Added

Informing potential customers about the product.

Value Chain

?

or

value chain5

Distribution

Value-Added

Non Value-Added

Delivering the product to customers.

Value Chain

?

or

value chain6

Customer Service

CS

Value-Added

Non Value-Added

Supporting customers who use the product.

Value Chain

?

or

managerial decisions

L.O. 2 Explain how cost accounting information is used for decision making and performance evaluation in organizations.

What adds value to the firm?

Managerial Decisions

Key Question

slide12

Should Carmen

expand operations?

Are costs greater than benefits?

What are Carmen’s cost drivers?

What are Carmen’s differential costs?

What are Carmen’s differential revenues?

Carmen’s Cookies

cost benefit analysis

Consider both the costs and benefits of a proposal.

Is the cost greater than the benefit?

Don’t Expand

Expand

Cost Benefit Analysis
cost driver

Cost Drivers

What are Carmen’s cost drivers?

Factors that cause or cost

What drives my cost?

These are estimates and require assumptions.

Cost Driver

drive

Some may be realized

Some may not be realized

slide15

FACTOR

COST

Cost Driver

Rent

Number of storefronts

Insurance

Labor

Number of cookies

Ingredients

slide16

Costs that change in response to a particular course of action.

Differential costs differ between actions.

Not expanding

Expanding

Differential Costs

differ

actions

slide17

Revenues that change in response to a particular course of action.

Differential revenues differ between actions.

Not expanding

Expanding

Differential Revenues

differ

actions

actual to budget continued

Other

1,500

1,500

0

Rent

5,000

5,000

0

Actual to Budget Continued
accounting systems

L.O. 3 Distinguish between the uses and users of cost accounting and financial accounting information.

Cost Accounting System

Financial Accounting System

Accounting Systems

Accounting systems are designed to provide information to decision-makers.

Provides information to decision-makers internal to the firm.

Provides information to decision-makers external to the firm.

accounting systems continued

Financial Accounting reports financial position and income according to Generally Accepted Accounting Principles (GAAP).

Data should be comparable across firms.

Cost Accounting measures, records and reports information about costs.

Data should be relevant for decisions in a particular firm.

Accounting Systems Continued
customers of cost accounting

Individual who purchases or uses a commodity or a service.

Customer

Customers of Cost Accounting

I love this customer.

I love this customer.

I love this customer!

We love customers.

We love happy customers.

We love loyal customers.

customers of cost accounting1

Individuals who use the information provided.

Managers making decisions in the firm.

Owners evaluating managers.

Customers of Cost Accounting

Cost Accounting

WHO ARE THE CUSTOMERS?

Managers

Owners

trends in cost accounting

L.O. 4 Identify current trends in cost accounting.

Trends in Cost Accounting

High-Tech Production Settings

Just-in-Time Method

Lean Production

Emphasis on Quality

Benchmarking

Activity-Based Costing

Enterprise Resource Planning

Six Sigma

Performance Measurement

lean production

A Lean Production philosophy focuses on:

Lean Production

Minimum inventory

Quality

Efficiency

Flexibility

Worker training

emphasis on quality

Quality as defined by the customer

Organization is managed to excel on all dimensions.

Emphasis on Quality

Total Quality Management (TQM)

Quality

slide31

Benchmarking methods measure products, services and activities against the best performance.

Benchmarking is an ongoing process resulting in continuous improvement.

Benchmarking

activity based costing abc
Activity-Based Costing (ABC)

ABC assigns costs of activities needed to make a product then sums the cost of those activities to compute a product’s cost.

slide33

Purchasing

Production

Information technology linking various systems of the enterprise into a single comprehensive information system.

Technology

Human Resources

Finance

Enterprise Resource Planning (ERP)

six sigma

A system for improving quality that uses data to improve processes and prevent defects.

Six Sigma

A statistical specification

slide35

Performance measurements indicate how well a process is working.

Performance Measurements

Balanced Scorecard

A performance measurement relying on multiple financial and nonfinancial measures of performance.

financial players in the organization

Chief Financial Officer (CFO)

Treasurer

Controller

Internal Auditor

Cost Accountant

Financial Players in the Organization
financial players in the organization1
Financial Players in the Organization

Manages the entire accounting and finance function.

Chief Financial Officer (CFO)

Manages liquid assets

Treasurer

Plans and designs information and incentive systems.

Controller

Ensures compliance with laws, regulations, and company policies and procedures.

Internal Auditor

Records, measures, estimates and analyzes costs.

Cost Accountant

slide38

L.O. 5 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.

Many accountants or business people have done small things, none of which appeared seriously wrong, but these small things added up to big trouble.

Ethical Issues For Accountants

you discover unethical conduct
You Discover Unethical Conduct

Now What?

Follow the organization’s established policies

Discuss problems with the immediate superior, unless superior is involved.

Submit the issue to the next higher managerial level.

Submit the issue to an acceptable reviewing authority.

Consider calling the confidential “hotline.”

The final recourse if ethical misconduct still exists is to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization.

slide40

What’s the intent?

Who is impacted?

Corporations?

Sarbanes-Oxley Act of 2002

Address problems of corporate governance

Accounting Firms

Corporations

Corporate Responsibility

slide41

Who is impacted?

What is the impact?

Corporate Responsibility

CEO

CFO

Chief Executive Officer

Chief Financial Officer

Manages the entire accounting and finance function.

Manages the entire corporation.

Sign financial reports and stipulate that financial statements do not omit material information.

Disclose evaluation of the company’s internal controls.

Disclose notification of any fraud involving management to Auditors, Audit Committee and Board of Directors.

slide42

Institute of Management Accountants’ Code of Ethics

Appendix

IMA Code of Ethics

Competence

Confidentiality

Integrity

Objectivity

competence
Competence

Members have a responsibility to:

Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills.

Perform their professional duties in accordance with relevant laws, regulations, and technical standards.

Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.

confidentiality
Confidentiality

Members have a responsibility to:

Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so.

Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality.

Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.

integrity
Integrity

Members have a responsibility to:

Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.

Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically.

Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions.

Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical objectives.

Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

Communicate unfavorable as well as favorable information and professional judgments or opinions.

Refrain from engaging in or supporting any activity that would discredit the profession.

objectivity
Objectivity

Members have a responsibility to:

Communicate information fairly and objectively.

Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented.

slide47

Chapter 1

Should I expand or not?

The End