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Cost Accounting Chapter 1

management accounting
measures, analyzes, and reports financial and nonfinancial information to help managers make decisions to fulfill organizational goals. Management accounting need not be GAAP compliant.
financial accounting
focuses on reporting to external users including investors, creditors, banks, suppliers, and governmental agencies. Financial statements must be based on GAAP.
accounting systems
are used to record economic events and transactions such as sales and the purchases of materials and then process the data into a format that is helpful for managers and others
cost accounting
measures, analyzes and reports financial and nonfinancial information related to the costs of acquiring or using resources in an organization.
True
T/F Today, most accounting professionals take the position that cost information is part of management accounting; therefore, the distinction between the two is not clear-cut and in this book, we often use the terms interchangeably.
management accounting
Purpose of info: help managers make decisions to fulfill an org’s goal
financial accounting
Purpose of info: communicate org’s financial position investor, bankers or regulators
management accounting
primary users: managers of the org
financial accounting
primary users: external users
management accounting
focus: future-oriented
financial accounting
focus: post-oriented
management accounting
rules of reporting: does not have to follow GAAP, but are based on cost-benefit analysis
financial accounting
rules of reporting: must follow GAAP, and be certified by external, independent auditors.
management accounting
time span: could be hourly to 20 years/focused: departments
financial accounting
time span: annually or quarterly financial reports/focused: company as a whole
management accounting
behavioral implications: designed to influence the behaviors of managers and employees
financial accounting
behavioral implications: primarily reports economic events, but also influences behavior because often times managers compensation is dependent on financial results
strategy
specifies how an organization matches its own capabilities with the opportunities in the marketplace.
cost leadership or product differentiation
what are the two broad strategies?
cost leadership
Strategy used by businesses to create a low cost of operation within their niche. The use of this strategy is primarily to gain an advantage over competitors by reducing operation costs below that of others in the same industry.
product differentiation
the process of distinguishing a product or service from others, to make it more attractive to a particular target market
Strategic cost management
describes cost management that specifically focuses on strategic issues.
competitive advantage
(1) their company’s cost, productivity or efficiency advantage relative to competitors or (2) the premium prices a company can charge relative to the costs of adding features that make its products or services distinctive.
management accounting strategic questions
Who are our most important customers, and how can we be competitive and deliver value to them?
management accounting strategic questions
What substitute products exist in the marketplace, and how do they differ from our own?
management accounting strategic questions
What is our most critical capability?
management accounting strategic questions
Will adequate cash be available to fund the strategy or will additional funds need to be raised?
creating value
is an important part of planning and implementing strategy.
value
the usefulness a customer gains from a company’s product or service.
the entire customer experience
determines the value a customer derives from a product.
delivered in a timely manner
Customers demand much more than just a fair price – they expect quality products _______________________
value chain
the sequence of business functions in which a product is made progressively more useful to customers.
Research & development
Design of Products and Processes
Production
Marketing
Distribution
Customer service
the value chain:
Research & development
(generating and experimenting with ideas related to new products, services or processes)
Design of Products and Processes
(detailed planning, engineering and testing of products and processes)
Production
(procuring, transporting and storing, coordinating and assembling resources to produce a product or deliver a service)
Marketing
(promoting and selling products or services)
Distribution
(processing orders and shipping products or services to customers)
Customer Service
(providing after-sales service to customers)
Management Accounting
provides information to inform each of these functions in the value chain.
administration
what is responsible for everything in the value chain
accounting, human resources, information technology
what else does administration include other than the value chain?
Cost and efficiency
Quality
Time
Innovation
Sustainability
Customers want companies to use the value chain to deliver ever-improving levels of performance when it comes to several (or even all) of the following:
Cost and efficiency
understanding the activities that cause costs to arise and managing them allows managers to react to the continuous pressure to reduce costs
quality
customers expect high levels of quality
time
two important dimensions of time are new-product development and customer-response time
Innovation
a constant flow of innovative products or services is the basis for the ongoing success of a company.
Sustainability
the development and implementation of strategies to achieve long-term financial, social and environmental goals.
Identify the problem and uncertainties.
Obtain information.
Make predictions about the future.
Make decisions by choosing between alternatives.
Implement the decision, evaluate performance, and learn.
what are the five steps of decision making?
planning; control
Of the five steps in decision making, the first four are _________ and the fifth is ________.
planning
selects goals and strategies, predicts results, decides how to attain goals, and communicates this to the organization.
budget
the most important planning tool-is the quantitative expression of a plan of activity by management and is an aid to coordinating what needs to be done to execute that plan.
control
takes actions that implement the planning decision, evaluates performance, and provides feedback and learning to the organization.
cost-benefit strategy, Behavioral and technical considerations, Different Costs for Different Purposes
Three guidelines help management accountants provide the most value to the strategic and operational decision- making of their companies:
Cost-benefit approach
benefits of an action/purchase generally must exceed costs as a basic decision rule.
Behavioral and technical considerations
people are involved in decisions, not just dollars and cents.
Different Costs for Different Purposes
Managers use alternative ways to compute costs in different decision-making situations.
Competence
Confidentiality
Integrity
Objectivity
The four standards of ethical conduct for management accountants as advanced by the Institute of Management Accountants are:
ethics
______ are the foundation of a well-functioning economy. Accountants have special ethical obligations given that they are responsible for the integrity of the financial information provided to internal and external parties.

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