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Cost Accounting:Information for Decision Making
Chapter 1
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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Value Chain
– Value added activities– Non value added activities
• The Value Chain describes a set of activities thattransforms raw materials and resources into thegoods and services end users purchase and consume.
L.O. 1 Describe the way managers use accountinginformation to create value in organizations.
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The Value Chain Components
Production
LO1
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Accounting Systems
Financialaccounting
Financialposition and
income
Reports
Costaccounting
Informationabout costs
Reports
L.O. 2 Distinguish between the uses and users of costaccounting and financial accounting information.
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Managerial Decisions
• Individuals make decisions.
• Decisions determine the performanceof the organization.
• Managers use information from the accountingsystem to make decisions.
• Owners evaluate organizational and managerialperformance with accounting information.
L.O. 3 Explain how cost accounting information is usedfor decision making and performance evaluationin organizations.
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Costs for Decision Making
• Carmen’s Cookies has been making and sellingcookies through a small store downtown.
• One of her customers suggests that she expandoperations and sell to wholesalers and retailers.
• Should Carmen expand operations?
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Carmen’s Cost Drivers
DriverCost
Rent
Insurance
Labor
IngredientsNumber of cookies
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Differential Costs, Revenues, and Profits
Sales revenueCosts:
FoodLaborUtilitiesRentOther
Total costs
Operating profits
$6,300
1,800 1,000 400 1,250 1,000$5,450
$ 850
$8,505a
2,700b
1,500b
600b
1,250 1,200c
$7,250
$1,255
$2,205
900 500 200 -0- 200$1,800
$ 405
(1) Status QuoOriginal Shop
Sales Only
(2) AlternativeWholesale & Retail
Distribution (3) Difference
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
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Responsibility Centers,Revenues, and Costs
Carmen DiazPresident
Ray AdamsVice-President
Retail Operations
Cathy PetersonVice-President
Wholesale Operations
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Responsibility Centers, Revenues, and CostsCarmen’s CookiesIncome Statement
For the Month Ending April 30
Sales revenueDepartment costs:
FoodLabora
UtilitiesRent
Total department costsCenter marginb
General and admin. costs:General manager’s salaryc
Other (administrative)Total general and admin. costsOperating profit
$28,400
13,500 4,500 1,800 5,000$24,800$ 3,600
$23,600
9,800 3,200 2,100 2,500$17,600$ 6,000
$52,000
23,300 7,700 3,900 7,500$42,400$ 9,600
5,000 3,200$ 8,200$ 1,400
RetailOperations
WholesaleOperations Total
(a) Includes department managers’ salaries but excludes Carmen’s salary
(b) The difference between revenues and costs attributable to a responsibility center
(c) Carmen’s salary
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Responsibility Centers, Revenues, and CostsCarmen’s Cookies
Retail Responsibility CenterBudgeted versus Actual CostsFor the Month Ending April 30
Food:FlourEggsChocolateNutsOther
Total foodLabor:
ManagerOther
Total laborUtilitiesRentTotal cookie costsNumber of cookies sold
$ 2,100 5,200 2,000 2,000 2,200$13,500
3,000 1,500$ 4,500 1,800 5,000$24,800 32,000
$ 2,200 4,700 1,900 1,900 2,200$12,900
3,000 1,500$ 4,500 1,800 5,000$24,200 32,000
$ (100) 500 100 100
-0- $ 600
-0- -0- $ -0- -0-
-0- $ 600 -0-
Actual Budget Difference
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Trends in Cost Accounting
1. Research and development
2. Design
3. Purchasing
4. Production
5. Marketing
6. Distribution
7. Customer service
8. ERP – Enterprise resource planning
9. Creating value in the organization
L.O. 4 Identify current trends in cost accounting.
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Enterprise Resource Planning
• Information technology linking various processesof the enterprise into a single comprehensiveinformation system
Technology
Purchasing
Human Resources
Marketing
Production
Finance
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Ethical Issues for Accountants
• The design of the cost accounting system hasthe potential to be misused to defraud customers,employees, or shareholders.
L.O. 5 Understand ethical issues faced by accountantsand ways to deal with ethical problems that youface in your career.
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Sarbanes-Oxley Act of 2002
What is theintent?
Who isimpacted?
How arecorporationsimpacted?
Address problemof corporategovernance
Accounting firmsand
corporations
Corporateresponsibility
LO5
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Appendix 1
Institute of Management Accountants’ (IMA)Code of Ethics: Standards
1. Competence
2. Confidentiality
3. Integrity
4. Credibility
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End of Chapter 1
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin