Information for Decision Information for Decision MakingMaking

Chapter Chapter 11

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Learning ObjectivesLearning Objectives1.Describe the way managers use accounting

information to create value in organizations.

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

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

4.Identify current trends in cost accounting.

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

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Value ChainValue Chain

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

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

R&R&DD DesigDesig

nn

ProductioProductionn DistributiDistributi

onon

MarketinMarketingg CustomerCustomer

ServicServicee

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Does this add

value?

ActivitiesActivities

Evaluate each activity

Non Value-Added

Activity: Customers perceive no

value.Can we

eliminate the activity?

Can we improve the activity?

R&R&DD DesigDesig

nn

ProductioProductionn DistributiDistributi

onon

MarketinMarketingg CustomerCustomer

serviceservice

Value Added Activity:

Customers perceive as

adding value.

Does this add value?Value Added

Activity: Customers perceive as

adding value.

Non Value-Added

Activity: Customers perceive no

value.

Hmmmm…?

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Value ChainValue Chain

Value-Added

Creating a new product.

Non Value-Added

Research and Development

R& D

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Value ChainValue Chain

Developing and engineering the new product.

Design

Value-Added

Non Value-Added

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Value ChainValue Chain

Production

Producing the product.

Value-Added

Non Value-Added

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Value ChainValue Chain

Informing potential customers about the product.

Marketing

Value-Added

Non Value-Added

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Value ChainValue Chain

Delivering the product to customers.

Distribution

Value-Added

Non Value-Added

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Value ChainValue Chain

Supporting customers who use the product.

Customer ServiceC

S

Value-Added

Non Value-Added

1-11Managerial Managerial DecisionsDecisions

What adds value to the firm?

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

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Carmen’s CookiesCarmen’s Cookies

Are costs Are costs greater greater than than benefits?benefits?What are What are

Carmen’s Carmen’s cost cost drivers?drivers?

What are What are Carmen’s Carmen’s differentidifferential costs?al costs?

What are What are Carmen’s Carmen’s differential differential revenues?revenues?

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Cost Benefit AnalysisCost Benefit AnalysisConsider both the costs and benefits of a proposal.

Is the cost greater than the benefit?

Don’t Expan

d

Expand

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What drives my cost?

Cost DriverCost Driver

These are estimates and require assumptions.

Cost DriversWhat are Carmen’s cost drivers?

Factors that cause or cost

Some may be realized

Some may not be realized

drive

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Cost DriverCost Driver

Number of storefronts

Rent

Number of cookies

Labor

Ingredients

Insurance

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

Differential CostsDifferential Costs

Differential costs differdiffer between actions.

differdiffer actions

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

Differential RevenuesDifferential Revenues

Differential revenues differdiffer between actions.

differdiffer actions

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Differential Costs, Revenues & Differential Costs, Revenues & ProfitsProfits

(1) (2) (3)

Operating profits ……. $850 $1,255 $405

Total costs ……………. $5,450 $7,250 $1,800

Other ………………….. 1,000 1,200c 200

Rent ……………………. 1,250 1,250 -----

Utilities …………………. 400 600b 200

Labor ………………….. 1,000 1,500b 500

CARMEN’S COOKIESProjected Income Statement For One Week

a 35 percent higher than status quo

b 50 percent higher than status quo

c 20 percent higher than status quo

Food …………………… 1,800 2,700b 900

Costs ……………………

Sales revenue ………... $6,300 $8,505a $2,205

Sales Only Distribution Difference

Original Shop Wholesale & Retail

Status Quo Alternative

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BudgetBudget

Other 2,200

A financial plan for the revenues and resources needed to meet financial goals.

Total Food 12,900

Nuts 1,900

Chocolate 1,900

Eggs 4,700

Flour $2,200

Food

CARMEN’S COOKIES

For the Month Ending April 30Budgeted Costs

Rent 5,000

Total cookie costs $24,200

Utilities 1,800

Total Labor 4,500

Other 1,500

Manager 3,000

Labor

Number of cookies 32,000

1-20Actual to Budget Actual to Budget ComparisonComparison

Difference

Total Food $13,500 $12,900 $600

Nuts 2,000 1,900 100

Chocolate 2,000 1,900 100

Eggs 5,200 4,700 500

Flour $2,100 $2,200 $(100)

Food

Actual Budget (Variance)

CARMEN’S COOKIES

For the Month Ending April 30Actual vs Budgeted Costs

Number of cookies sold 32,000 32,000 0

Costs

02,2002,200 Other

1-21Actual to Budget Actual to Budget ContinuedContinued

Total cookie costs $24,800 $24,200 $600

Utilities 1,800 1,800 0

Total Labor 4,500 4,500 0

Manager 3,000 3,000 0

Labor

Difference

Actual Budget (Variance)

01,5001,500 Other

05,0005,000Rent

1-22Accounting Accounting SystemsSystemsL.O. 3 Distinguish between the uses and users of cost

accounting and financial accounting information.

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

Financial Accounting System

Cost Accounting System

Provides information to decision-makers external to the firm.

Provides information to decision-makers internal to the firm.

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

Accounting Systems Accounting Systems ContinuedContinued

Cost Accounting measures, records and reports information about costs.

Data should be relevant for decisions in a particular firm.

Data should be comparable across firms.

1-24Customers of Cost Customers of Cost AccountingAccounting

Individual who purchases or uses a commodity or a service.

I love this customer!

I love this customer.

I love this customer.

1-25Customers of Cost Customers of Cost AccountingAccounting

Managers making decisions in the firm.

Managers

Individuals who use the information provided.

Owners evaluating managers.

Owners

1-26Trends in Cost Trends in Cost AccountingAccounting

High-Tech Production Settings

Just-in-Time Method

Lean ProductionEmphasis on

QualityBenchmarking Activity-Based

Costing

Six SigmaPerformance Measurement

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

Enterprise Resource Planning

1-27High-Tech Production Settings

Manufacturing cost driven by technology rather than labor.

1-28Just-in-Time Just-in-Time MethodMethod

Units are produced or purchased just in time for use, keeping inventories at a minimum.

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Lean Production

Quality

Efficiency

Flexibility

Worker training

A Lean Production philosophy focuses on:

Minimum inventory

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Emphasis on QualityEmphasis on Quality

Organization is managed to excel on all dimensions.

Quality as defined by the customer

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BenchmarkingBenchmarking

Benchmarking is an ongoing process resulting in continuous improvement.

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

1-32Activity-Based Costing Activity-Based Costing (ABC)(ABC)

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

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Finance

Enterprise Resource Planning Enterprise Resource Planning (ERP)(ERP)

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

Technology

PurchasingProduction

Human Resources

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Six SigmaSix Sigma

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

A statistical specification

1-35Performance Performance MeasurementsMeasurements

Performance measurements indicate how well a process is working.

Balanced ScorecardA performance measurement relying on

multiple financial and nonfinancial measures of performance.

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Financial Players in the Financial Players in the OrganizationOrganization

Chief Financial Officer (CFO)

Treasurer

Controller

Internal Auditor

Cost Accountant

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Financial Players in the Financial Players in the OrganizationOrganization

Chief Financial Officer (CFO)

Treasurer

Controller

Internal Auditor

Cost Accountant

Manages the entire accounting and finance function.

Manages liquid assets

Plans and designs information and incentive systems.

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

measures, estimates and analyzes costs.

1-38Ethical Issues For Ethical Issues For AccountantsAccountants

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

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

1-39You Discover Unethical You Discover Unethical ConductConduct

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.

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Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act of 2002

What’s the

intent?

Address problems of corporate governance

Who is impacted

?

Accounting Firms

Corporations

Corporations?

Corporate Responsibility

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Chief Financial Officer

CFO

Corporate ResponsibilityCorporate Responsibility

Who is impacted?

Chief Executive

Officer

CEO

Manages the entire accounting and finance function.

Manages the entire corporation.

What is the impact?

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.

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AppendixAppendix

Institute of Management

Accountants’ Code of Ethics

Competence

ConfidentialityIntegrit

y Objectivity

IMA Code of Ethics

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CompetenceCompetenceMembers 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.

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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.

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IntegrityIntegrityMembers 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.

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ObjectivityObjectivity

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.

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Chapter 1

Should I expand or

not?