Class Notes For Cost Accounting, 15th Edition

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1-1Copyright © 2015 Pearson Education, Inc.The Manager and ManagementAccountingTRANSITION NOTESThis chapter introduces the five-step decision process utilized by managers to make a varietyof decisions. This process becomes an underlying theme of the text as it is applied to anumber of types of decisions throughout the text. The five steps include (1)identify theproblem and uncertainties, (2) obtain information, (3) make predictions about the future, (4)make decisions by choosing among alternatives,and(5) implement the decision. With theemphasis on the five-step decision process, material relating to theproblem-solving,scorekeeping, and attention-directing roles of the management accountant arestreamlined.There is also an increased emphasis on the linkage between the set of business functions inthe value chain and customer expectations as key success factors.PROBLEM MATERIALCORRELATION CHART15thEdition14thEdition15thEdition14thEdition16161717181819192727Revised2020Revised28 New28Revised2121Revised2929Revised2222Revised3030 Revised2323Revised31 New32 New33 New34 New35 New36 New31 RevisedI.LEARNING OBJECTIVES1.Distinguish financial accounting from management accounting.2.Understand how management accountants affect strategicdecisions.3.Describe the set of business functions in the value chain and identify thedimensions of performance that customers are expecting of companies.4.Explain the five-step decision-making process and its role in managementaccounting.5.Describe three guidelines management accountants follow in supportingmanagers.6.Understand how management accounting fits into an organization’s structure.7.Understand what professional ethics mean to management accountants.1

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1-2Copyright © 2015 Pearson Education, Inc.II.CHAPTER SYNOPSISChapter 1 is an important introductory chapter.The underlying premise of this text,CostAccounting: A Managerial Emphasis(15thed.), is the importance of cost accounting datain making managerial decisions.Distinction is made between financial accounting andmanagerial accounting.Financial accountinginformation is reported to external usersand used by investors, lenders, suppliers,and other external stakeholders to evaluate andcompare companies. Itfollowsprescribed standards and formats.In contrast,management accountingprovidesfinancial and nonfinancial information to internalusersemployingwhatever format or costing approachthat willallow managers to makethe best possible business decisions in today’s competitive environment. Cost accountingprovides information for both financial accounting and management accounting; in thistext the termscost accountingandmanagement accountingare used interchangeably.Successful management accounting systems capture and reportinformation that helpsmanagers make decisions to fulfill organizational goals in an effective and efficientmanner. Management accounting also provides information critical to the planning andcontrol decisions of managers.A five-step decision process is introduced to guide successful decision making:identifythe problem, obtain information, make predictions about outcomes, make a decision, andimplement the decision.Key guidelines for management accountants include:cost-benefit analysis, behavioralconsiderations, technical considerations, and different costs for different purposes.Understanding of these guidelines is essential for the student to have a solid foundationfor material that is presented later in the text.As those responsible for the integrity of the accounting information used by external andinternal parties, accountants must maintain the highest of ethical standards. They musttake special care to avoid the appearance of ethical improprieties—not only avoidunethical behavior, but avoid the appearance of such.The Sarbanes-Oxley Act of 2002,passed in response to several large accounting scandals, imposes strict ethical standardson accountants. Professional associationssuch asthe AICPA and the IMA not onlyimpose additional standards on their members but also provide resources that helpmembers identify ethical issues and possible courses of action when ethical dilemmasconfront them.III.POINTS OF EMPHASIS1.Make sure that the students understand the perspective of costaccounting andhow it differs from that of financial accounting.2.The cost-benefit ratio is pervasive throughout the text. The students should graspthis concept early or they will not fully understand cost accounting.3.Another recurring theme throughout the text is the five-step decision model.Emphasize this concept and be certain the students are operationally familiarwith it.

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1-3Copyright © 2015 Pearson Education, Inc.4.The guidelines to management accounting covered in Learning Objective 5 givethe student a proper perspective in order to “do” management accounting.5.It is helpful and sets an ethical tone for the class if you go over the pointsincluded in the IMA Code of Ethical Conduct. Discuss the definitions of theterms covered in the Code, making certain that the students have a grasp of whatis involved in ethical conduct.IV.CHAPTER OUTLINELEARNINGOBJECTIVE1Distinguish financial accounting…reporting on past performance to external usersfrom management accounting…helping managers make decisions1.1Accountingsystems process economic events and transactions into informationhelpful to managers. This data is collected, categorized, summarized, andanalyzed.1.2Accounting systems provide information found in the financial statements as wellas in internal performance reports.1.3Managers use this information to administer the activities of their area ofresponsibility.1.4Information needs may vary depending on managerial needs.TEACHING POINT.It is good here to stop and evaluate thedifferent needs of differentusers within the company.Salesmanagersareinterestedinsalesdatabyregionorsalesperson; distribution managers may be interested in orders bygeographic location or requested due dates; manufacturingmanagers may be interested in quantities of products orderedso production scheduling can occur.All of these are interestedin different aspects of the sales data.1.5Management accounting has a different focus than financial accounting. Themanagement accountantreports financial and nonfinancial information that helpsmanagers make decisions that will help the company achieve its goals orimplement its strategy. It is forward-looking.TEACHING POINT.Students need to understand from thestart the “decision-making” focus of management accounting.

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1-4Copyright © 2015 Pearson Education, Inc.1.6Management accounting reports information in a manner that will help managersdo their jobs better and are not restricted by Generally Accepted AccountingPrinciples.TEACHINGPOINT.Thisisagoodtimetointroduceanoverriding element of management accounting—the cost-benefitratio.Engagethestudentsinacost-benefitanalysisfrompersonal experience. For example, compare the cost of getting acollege education (including lost wages) with the benefits. Linkthe discussion to the original decision to (1) attend college and(2) the choice of a college.1.7Financial accounting has a historical focus, as it reports the results of operationsto external parties. These reports must adhere to Generally Accepted AccountingPrinciples.1.8Cost accounting andfinancial accounting do not operate independently. Costaccounting, in addition to providing information for management accountingdecision-making needs, also provides data to meet financial accountinginventory-valuation needs.(Exhibit 1-1 summarizes the majordifferences between financialand managerial accounting.)1.9Costmanagementdescribes the approaches and activities of managers to useresources to increase the value to customers and to achieve organizational goals.It is not just about reducing costs, but involves revenue and profit planning aswell.TEACHING POINT.Students are frequently confused by costaccounting terminology. Explain that different practices arise indifferent companies.Becausecost accounting is not for externalreporting purposes, thereis frequently a lack of communicationamongcompanies,andnostandardterminologydeveloped.Many cost accounting terms lack a uniform definition, and manypractices may go by different names.Refer toQuizQuestion 1LEARNINGOBJECTIVE2Understand how management accountants affectstrategic decisions…they provide information about the sources ofcompetitive advantage2.1Strategydescribes how an organization will compete and the opportunitiesmanagement should pursue. It involves matching its capabilities with theopportunities in the marketplace to accomplish its objective.

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1-5Copyright © 2015 Pearson Education, Inc.TEACHING POINT. Emphasize here the difference in strategicand tactical decisionmaking. Strategyfocuses on the longtermandisperformedbyuppermanagement.Tacticaldecisionmaking is shortterm and is in the realm of lower to middlemanagement. For students a strategic decision is their choice ofa college and a major. A tactical decision would be what class tostudy for tonight.2.2Two broad strategies include competing on the basis of price or on the basis ofproduct differentiation.TEACHING POINT. Have the students brainstorm for names ofcompanies that have pursued either strategy. How have theyimplemented the strategy of price competition? How have theydifferentiated the product?2.3Strategiccost managementdescribes cost management specifically focused onstrategic issues. This seeks answers to questions such as:•Who are our most important customers and how do we deliver value tothem?•What substitute products exist in the market? How do they differ fromours?•What is our most critical capability? What do we do best?•Will adequate cash be available to fund the strategy or is outsidefinancing needed?Refer to Quiz Question 2Problem 1-25LEARNINGOBJECTIVE3Describe theset of business functions in the valuechain and identify the dimensions of performancethat customers are expecting of companies…R&D, design, production, marketing, distribution,and customer service supported by administrationto achieve cost and efficiency, quality, time, andinnovation3.1Thevaluechainis the sequence of business functions in which customerusefulness is added to products or services.(Exhibit 1-2illustrates the six business functions in the valuechain.)3.2Research anddevelopmentinvolves generating and experimenting with newideas related to new products, services, or processes.

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1-6Copyright © 2015 Pearson Education, Inc.3.3Thedesignfunction undertakes detailed planning and engineering of products,services, or processes.3.4Productionisacquiring, coordinating, and assembling resources to produce aproduct or deliver a service.3.5Marketinginvolves promoting and selling products or services to customers.3.6Distributionis the process of delivering the products or services to customers.3.7Customerserviceprovides after-sale support to customers.TEACHING POINT.All of these functions are important andinterrelated.The failure of a company to deliver any one ofthese adequately will have a negative impact on the others.Ask the students about negative experiences they have hadwith a company and which element of the value chain wasinvolved.Probe further, exploring how this failure impacted thestudent’s perception of the company in other areas.3.8Management accountants are involved in the value chain as they keep track ofcosts incurred in each category. This information helps managers evaluate cost-benefit trade-offs.3.9Related to the value chain is the supply chain.Whereasthevalue chainisinternal, thesupply chaininvolves the flow of goods, services, and informationfrom the initial source of materials and services to the delivery to consumers. Thevalue chain can involve one or many different organizations.(Exhibit 1-3 illustrates an overview of the value chain.)3.10The value chain and supply chain should be used by the company to deliverimproving levels of performance for the customer. Key success factors inaccomplishing this delivery include the following:•Cost and efficiency—Determine what customers are willing to pay for aproduct or service and set atarget price.By subtracting the desiredprofit, the company can then work to accomplish itstarget cost.•Quality—Customers expect high levels of quality.Total QualityManagement (TQM) is a philosophy that seeks to improve operationsthroughout the company and exceed customer expectations.TEACHING POINT.Emphasize that quality does not have tobe the most expensive. A product or service can be a qualityproduct or service if it conforms to its intent. This is quality ofconformance.Qualityofdesignrelatestoproductsbeingthought of as being top-notch. A Rolls Royce automobile hasqualityofdesign.Thereisamorethoroughdiscussion ofquality in Chapter 19.•Time—New product development time and customer response time aretwo elements of this factor. In today’s time-conscious society, thecustomer wants the product or service now. Any delay is unacceptable. Acompany that can compete on the basis of time, whether in developmentor delivery is one that has an edge in today’s market.

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1-7Copyright © 2015 Pearson Education, Inc.TEACHINGPOINT.WhenFredSmithfoundedFederalExpress to deliver packages overnight, many thought he wouldnot succeed.However, Smith realized an unmet demand forquick delivery.•Innovation—Aconstant flow of new products or services is the basis forongoing company success.•Sustainability—Companiesincreasingly apply the key success factorsof cost and efficiency, quality, time and innovation to promotesustainability.Refer to Quiz Questions 3 and 4Exercise1-18LEARNINGOBJECTIVE4Explain the five-step decision-making process andits role in management accounting…identify the problem and uncertainties, obtaininformation, make predictions about the future,makedecisions by choosing among alternatives,and implement the decision, evaluate performance,and learn to do planning and controland its role in management accounting…planning and control of operations and activities4.1Managers should go through a routine process in order to make effectivedecisions. This five-step decision process can be utilized to make a variety ofdecisions.•Identify the problems and uncertainties.What are the choices that arebeing faced and where do the uncertainties lie?•Obtain information.Gather information before making a decision helpsthe manager to make a more informed decision.TEACHING POINT.Guard against information overload, orobtaining too much information.Narrow the choices sothevolume of information is manageable.Too much informationcan lead to “paralysis of analysis,” or the inability to formulate aviable solution.•Make predictions about the future.On the basis of the informationobtained attempt to predict the outcome of each course of action.•Make decisions by choosing among alternatives.The information hasbeen gathered and projections made. Select an alternative.

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1-8Copyright © 2015 Pearson Education, Inc.TEACHING POINT. Do not shy away from making a decision.Someone once asked the President ofGeneral Motors if hehad ever made a bad decision.His response was that to reachthe level of success he had achieved, you were doing good tobat .500.You are going to make bad decisions, learn fromthem.Collectively,the four preceding steps are known asplanning—theselection of organizational goals, predicting results under alternativeways of achieving these goals, deciding how to attain these goals, andcommunicating the goals to the entire organization.Abudgethas been described as the quantitative expression of aproposed plan of action. It is a planning tool.Controlis the action taken to implement the planning decisionsrepresented by the budget.•Implement the decision, evaluate performance, and learn.All theeffort expended in steps 1through4 is useless unless the decision is putinto action.TEACHING POINT.Most people have been associated withorganizations or individuals who would have great plans, andwould go through steps 1through4 of the process, only to failto implement the decision.A colleague once came into workone morning, announcing an intention to return to school for anadvanced degree.Fifteen years later, that colleague is still inthe same company, without the degree.Once implemented, the decision must be monitored. This is performanceevaluation. One way of doing this is by comparing the budget with theactual results. This makes budgeting a control tool in addition to aplanning tool. Often this is accomplished by the use of a performancereport.TEACHING POINT.Monitoring also helps keep the plan (orbudget) realistic.If the person proposing the project knows theresults will not be monitored, there is a tendency to overstatethe benefits so the project will receive approval.Learn.If the results were not as planned, find out why. Use thisinformation to improve the decision-making process for future decisions.Refer to Quiz Question 5Exercise1-23,24

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1-9Copyright © 2015 Pearson Education, Inc.LEARNINGOBJECTIVE5Describe threeguidelines managementaccountants follow in supporting managers…employing a cost-benefit approach, recognizingbehavioral as well as technical considerations, andcalculating different costs for different purposesTEACHING POINT.These guidelines arethefoundationfor therest of the text.Students must understand that everything that istofollowmustbefilteredthroughthelensofcost-benefit,behavioral and technical considerations, and different costs fordifferent purposes.5.1Cost-benefitapproach.Always ask if the benefits from undertaking the activityexceed the costs of doing so.5.2Behavioraland technicalconsiderations.Consider the motivational aspect of thedecision. Will the managers and employees be motivated to work toward the goalsof the organization?Technical considerations provide managers with appropriateinformation at appropriate intervals to assist in decision making.5.3Different costs for different purposes.Much of this book is about alternative waysto compute costs. In determining the cost, the first question that should be asked is“What is the purpose of this cost number?” Performance evaluation, externalreporting,andinternal decision making are three different purposes that mightrequire a different view of cost.Refer to Quiz Question 6LEARNINGOBJECTIVE6Understand how management accounting fits intoan organization’s structure…for example, the responsibilities of the controller6.1Most organizations distinguish betweenlineandstaffrelationships.Linemanagementis directly responsible for attaining the goals of the organization.Productionis a line function.Staff managementsupports line management withadvice and assistance. Accounting and human resources are two examples of staffmanagement functions.6.2TheChief Financial OfficerorCFO(also called the finance director) is theexecutive responsible for overseeing the financial operations of an organization.Included among the responsibilities of the CFO are several functions:

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1-10Copyright © 2015 Pearson Education, Inc.•Controllerprovides financial information to managers and shareholdersand oversees the overall operations of the accounting system.•Thetreasuryfunction includes banking, financing, investments, and cashmanagement.•Riskmanagementincludes managing the financial risk of interest rate andexchange rate changes as well as derivatives management.•Taxationincludes income taxes, sales taxes, and international tax planning.•Investorrelationsresponds to and interacts with shareholders.•Strategicplanningincludes defining strategy and allocating resources toimplement strategy.The scopeand importanceofaninternalaudithasincreased in recent years and now includes reviewing andanalyzing financial and other records to attest to theintegrityoftheorganization’sfinancialreportsandadherence to policies and procedures.(Exhibit 1-6illustrates a typical organization chart for the CFO)Refer to Quiz Questions 7 and 8Problem 1-32LEARNINGOBJECTIVE7Understand what professional ethics means tomanagement accountants…for example, management accountants mustmaintain integrity and credibility in every aspect oftheir job7.1Accountants have a special obligation regarding ethics, as they are responsiblefor the integrity of the financial information provided toexternal and internalusers.7.2Sarbanes-Oxley focuses on improving internal control, corporate governance,monitoring of managers, and disclosure practices of public corporations. Thislegislation brought an increase in the ethical standards of managers andaccountants.7.3TheInstitute of Management Accountants (IMA)is the largest association ofmanagement accountants in the United States.7.4The IMA offers professional certification in the form of theCMAdesignation—Certified Management Accountant.This certification represents ademonstration of technical competency in financial and managerial accountingand holds the CMA to high ethical standards.

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1-11Copyright © 2015 Pearson Education, Inc.7.5The IMAStandards for Ethical Conduct for Practitioners of ManagementAccounting and Financial Managementpresents guidelines on issues relating tocompetence, confidentiality, integrity, and credibility.(Exhibit 1-7 is a copy of the IMA Ethical Conduct Statement.)7.6In addition to theStandards,the IMA has an ethics hotline to assist members inresolving their ethical dilemmas.TEACHINGPOINT.Studentssometimesdon’trealizetheimportance of proper ethical behavior.A sign on a church onceread“Integrity—Gainedover alifetime,lostinaninstant.”Emphasize that integrity, once lost,is difficult to regain.Also, itis important for the accountant to avoid even the appearanceof unethical conduct.Refer to Quiz Questions 9 and 10Exercise1-3V.OTHER RESOURCESTo download these and other resources, visit the Instructor’s Resource Centerwww.pearsonhighered.com.The following exhibits were mentioned in this chapter of the Instructor’s Manual, andhave been included in thePowerPoint Lecture presentationcreated specifically for thischapter. You may use the PowerPoint Lecture presentations “as is”, or modify them tosuit your individual needs.Exhibit 1-1 summarizes the main differences between financial and managerialaccounting.Exhibit 1-2 illustrates the six business functions in the value chain.Exhibit 1-3 illustrates an overview of the value chain.Exhibit 1-6 illustrates a typical organization chart for the CFO.Exhibit 1-7 is a copy of the IMA Ethical Conduct Statement.CHAPTER 1 QUIZ1.Why do most companies adhere to GAAP for their basic internal financialstatements?a.GAAP is required by law for publicly held companies.b.To use GAAP and another system of reporting would be too costly for mostcompanies.c.Accountants are required by their code of ethics to use GAAP accounting.d.Accrual accounting provides a uniformmethodto measure an organization’sfinancial performance.2.Which of the following isnottrue about strategy?

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1-12Copyright © 2015 Pearson Education, Inc.a.It involves matching its capabilities with the opportunities in the marketplace toaccomplish its objective.b.It has a short-term focus.c.Itcan be implemented through price competition or product differentiation.d.It involves the use of strategic cost management.3.Thevalue chaina.involves external companies as well as internal activities.b.is the sequence of business functions in which customer usefulness is added toproducts or services.c.applies only to manufacturing companies.d.is not relevant in today’s cost accounting environment.4.Which of the following isnota key success factor in a company’s effort to deliverincreased levels of performance to the customer?a.Timeb.Innovationc.Qualityd.Price reduction5.The five-step decision processa.includes planning and control activities.b.is performed exclusively by management accountants.c.isnot often used, as the costs exceed the benefits.d.must be performed following GAAP guidelines.6.In supporting managers, management accountants havethreeguidelines. These guidelinesare:a.Cost-benefit analysis, performance reporting, behavioral considerations, andtechnical considerations.b.Cost-benefit analysis, behavioral considerationsandtechnical considerations, anddifferent costs for different purposes.c.Financial statement preparation, technical considerations, strategic direction, andbudgeting.d.Following functional lines of authority, cost-benefit analysis, behavioralconsiderations, and use of the value chain.7._____ management exists to provide advice and assistance to those responsible forattaining the objectives of the organization.a.Lineb.Functionalc.Staffd.Risk8.The Treasurera.is the executive responsible for overseeing the financial operations of anorganization.b.undertakesbanking, financing, investments, and cash management duties.

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1-13Copyright © 2015 Pearson Education, Inc.c.providesfinancial information to managers and shareholders and oversees theoverall operations of the accounting system.d.is a different title for the Controller.9.Which of the following isnotone of the ethical responsibilities of a managementaccountant?a.Complianceb.Confidentialityc.Integrityd.Objectivity10.The Institute of Management Accountants issues which certification?a.CPAb.CIAc.CFEd.CMA

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2-15Copyright © 2015 Pearson Education, Inc.An IntroductiontoCost TermsandPurposesTRANSITION NOTESThis chapter has been rewritten to place more emphasis on the role of managerial decisions.Exhibits have been changed so students can more easily follow the concepts. This chaptercontinues building on the framework begun in Chapter 1, emphasizing (1) calculating the costof products or other cost objects, (2) obtaining information for planning and control as well asperformance evaluation, and (3) identifying relevant information for decision making. Itintroduces concepts essential to topics covered in later chapters.PROBLEM MATERIALCORRELATION CHART15thEdition14thEdition15thEdition14thEdition1616292917173030Revised1818Revised313119193232Revised20203333Revised212134342222Revised35352323Revised3636Revised2424373725253838Revised2626Revised3939Revised27274040Revised2828414241Revised42RevisedI.LEARNING OBJECTIVES1.Define and illustrate a cost object.2.Distinguish between direct costs and indirect costs.3.Explain variable costs and fixed costs.4.Interpret unit costs cautiously.5.Distinguish inventoriable costs from period costs.6.Illustrate the flow of inventoriable and period costs.7.Explain why product costs are computed in different ways for different purposes.8.Describe a framework for cost accounting and cost management.2

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