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Cost Accounting Home


Basic Terms and Definitions
Cost Accounting - Basic Concepts

 

Cost Accounting

  • Provides information for managerial and financial accounting
  • Help managers make informed decisions
  • Help motivate managers and employees and align them with the company’s objectives
  • A financial reporting cost may not be appropriate for internal evaluation – often a financial measure must be refined to properly describe what a manager is looking for/evaluating
  • Five main differences between managerial and financial accounting
    • Internal versus external reporting
    • Not as restricted – external most conform to GAAP
    • Managerial focuses on the future
    • More wide-ranging, rather than primarily financial statements
    • Emphasis on influencing the behavior of management
  • Cost-Benefit Approach
    • In implementing any new process/decision, the expected benefits should outweigh the costs.  Many times, determining the value of expected benefits may be difficult.  Consider the collection of accounting data to help make decisions – how do we put a dollar value on the benefit of making informed decisions?  However, cost-benefit analysis will be a reoccurring theme throughout cost accounting.
  • Within an organization there is a division in organizational structure between the line management and staff management
    • The line management directly execute the objectives of the company
      • Manufacturing, Distribution, Marketing, Sales
    • The staff management assist the line managers
      • Accountants, Information technology

Strategy

  • How a company will use its capabilities to compete in the marketplace
    • Must evaluate the company’s capabilities
      • Any effect on current assets – such as cash
      • Any effect on long-term assets – flexibility (able to adapt to customer preferences)
  • The opportunities the company will pursue
  • Understanding a company’s competitive advantages
    • May be from employee skill/knowledge, acquisition cost advantages, or a network of relationships with customers and suppliers

Execution of a Strategy

  • Planning involves:
    • Selecting a goal
    • Determining ways to achieve the goal
    • Deciding the best course of action to achieve the goal
    • Communicating the goal and coarse of action throughout the company
  • Control entails
    • The actual implementation of the plan
    • The defining, communication, and use of performance evaluations
    • The defining, gathering, and use of feedback
      • Feedback is the systematic gathering and evaluation of information to help management refine current operations
  • Budgets are created to communicate a plan quantitatively
    • Involves planning and control stages
    • Require communication throughout the company to create the budget (planning)
    • Provides feedback by allowing a comparison between budgeted expectations and actual (control)
  • Problem Solving, Scorekeeping, and Attention Directing assist with the strategy
    • When planning, problem solving is the analysis of the various options to decide which action is the most appropriate
    • Scorekeeping and Attention Directing affect control decisions.
      • Scorekeeping involves the collecting, compiling, and reporting of data to management to show the strategies current status
      • Attention Direction is an account’s role to highlight the problems and opportunities within the current strategy.  The goal is for management to act on opportunities which will benefit the company.
      • Both of these roles provide feedback so management may refine the strategy
    • All three of these roles occur simultaneously for the accountant

Management Accounting Systems – These four themes overlap and interact together

  • Customer Focus
    • A Prominent theme – Customer Driven
    • Identifying and focusing on acquiring and retaining customers which are the most beneficial/profitable to the company
    • We want to track that internal business functions (unseen by the customer) are actually adding value to the customer
      • Moving inventory around a warehouse does not
  • Value-chain and supply-chain analysis
    • Value-chain is a sequence of functions which add value to the company’s product or service – there are six main functions
      • Research and Development – Experimentation and creation of new processes, products, and services
      • Design – The engineering/modeling of the new processes, products, and services
      • Production – The process of converting acquired resources into the final product or delivery of a service
      • Marketing – The promotion and sale of the new product or service
      • Distribution – The delivery of products or service to customers
      • Customer Service – The after-sale customer support
    • Note: Although the value-chain is a sequence, when management is creating a strategy/plan, should not proceed through as a line item, but as a total interactive package
    • Supply-Chain is the flow of information, goods, and/or services from the most basic material to the consumer (whether comprising of one company – vertical monopoly or a series of companies)
      • The emphasis is to integrate the components of the Supply-chain along with each components value-chain to provide the most efficient and effect outcome
      • Typical Supply Chain
        • Supplier of raw materials
        • Manufacturer
        • Distributor
        • Retailer
        • Consumer
  • Common Success Factors
    • Quality
      • The continuous improvement of the value chain to produce products and service which exceed customer expectations
      • Total Quality Management (TQM) includes this ideology from the initial creation of the product/service from customer specifications to after-sale support
      • The reduction of rework, scrap and spoilage is a common goal
    • Cost and Efficiency
      • Since cost reduction is a common theme, knowledge of what each process does and why it exists and adds value is essential to the efficient production of a product or service
    • Time
      • New-Product Development Time describe how long it takes for a company to bring a new product to market from its inception
      • Customer-Response Time describes how long it takes an organization to respond to a customers request
      • Bottlenecks describe the stage in the value chain which is constraining the company’s output.
    • Innovation
      • After development, the company must still pursue research to improve the product or service to better match customer needs and improve customer satisfaction
  • Benchmarking
    • A company goes through continuous improvements by always striving to be more effective and efficient.  Management sets benchmarks for key goals, such as customer satisfaction, scrap reduction goals, quality measures.  Typically, the exemplary competitor within the industry will be used to set these benchmarks.

 

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