Information for Decision

Making

Chapter
1

Learning Objectives
1.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.

1-2

Value Chain

1-3

L.O. 1 Describe how managers use accounting

information to create value in organizations.

The value chain describes the

activities that increase the value
of an organizations products or
services.
Productio
Marketin
R&
Customer
n
g
Distributi
Desig
D
Servic
on
n
e

1-4

Activities

Productio
Marketin
R&
Customer
n
g
Distributi
Desig
D
service
on
n
Value
Non ValueAdded
Activity:
Added
Does
this
Hmmmm
Customers
Activity:
add as
perceive
Customers
? value?
adding
perceive
value.
no
value.

Evaluate each
activity

Does this add

value?
Value
Added
Activity:
Customers
perceive as
adding value.

Can we improve
the activity?

Non ValueAdded
Activity:
Customers
perceive no
value.

Can we
eliminate the
activity?

1-5

Value Chain
R&
D

Research
and
Developme
nt
Creating a

new
product.

ValueAdded

Non ValueAdded

1-6

Value Chain
Design

Developing and
engineering the new
product.

ValueAdded

Non ValueAdded

1-7

Value Chain
Production

Producing
the
product.

ValueAdded

Non ValueAdded

1-8

Value Chain
Marketing

Informing potential
customers about the
product.

ValueAdded

Non ValueAdded

1-9

Value Chain
Distribution

Delivering the
product to
customers.

ValueAdded

Non ValueAdded

1-10

CS

Value Chain
Customer
Service

Supporting
customers who use
the product.

ValueAdded

Non ValueAdded

1-11

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

What adds
value to the
firm?

Carmens Cookies
Are costs
greater
than
What arebenefits? What are
Carmens
Carmens
cost
differenti
drivers?
al costs?
What are
Carmens
differential
revenues?

1-12

Cost Benefit Analysis

Consider both the costs and benefits of a
proposal.

Is the cost greater than the

benefit?

Dont
Expan
d

Expan
d

1-13

1-14

Cost Driver
What are
Carmens
cost
drivers?
What
drives my
cost?

Cost Drivers

Factors that cause

or drive cost

These are estimates

and require
assumptions.
Some
may be
realized

Some may
not be
realized

1-15

Cost Driver

Ren
t
Insuranc
e
Labo
r
Ingredient
s

Number of
storefronts

Number
of cookies

Differential Costs
Costs that change in
response to a particular
course of action.
Differential costs
differ
differ between
actions
actions.

1-16

Differential Revenues
Revenues that change in
response to a particular
course of action.
Differential revenues
differ
differ between
actions
actions.

1-17

1-18

Differential Costs, Revenues &

ProfitsCARMENS COOKIES
Projected Income Statement For One Week
(1)

(2)

Status Quo

Alternative

Original Shop

Wholesale & Retail

Sales Only

Distribution

Difference

$6,300

$8,505a

$2,205

Food

1,800

2,700b

900

Labor ..

1,000

1,500b

500

Utilities .

400

600b

200

Rent .

1,250

1,250

-----

Other ..

1,000

1,200c

200

Total costs .

$5,450

$7,250

$1,800

Operating profits .

$850

$1,255

$405

Sales revenue ...

(3)

Costs

35 percent
higher than
status quo

50 percent
higher than
status quo

20 percent
higher than
status quo

1-19

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

CARMENS COOKIES
Budgeted Costs
For the Month Ending April 30
Number of cookies
Food

32,000

Labor

Flour

$2,200

Manager

3,000

Eggs

4,700

Other

1,500

Chocolate

1,900

Total Labor

4,500

Nuts

1,900

Utilities

1,800

Other

2,200

Rent

5,000

Total Food

12,900

Total cookie costs

$24,200

1-20

Actual to Budget
Comparison
CARMENS COOKIES
Actual vs Budgeted Costs
For the Month Ending April 30
Difference
Actual

Budget

(Variance)

32,000

32,000

Flour

$2,100

$2,200

$(100)

Eggs

5,200

4,700

500

Chocolate

2,000

1,900

100

Nuts

2,000

1,900

100

Other

2,200

2,200

Total Food

$13,500

$12,900

$600

Number of cookies sold

Costs
Food

1-21

Actual to Budget
Continued
Difference
Actual

Budget

(Variance)

Manager

3,000

3,000

Other

1,500

1,500

Total Labor

4,500

4,500

Utilities

1,800

1,800

Rent

5,000

5,000

$24,800

$24,200

$600

Labor

Total cookie costs

Accounting
L.O. 3 Distinguish between the uses and users of cost
Systems
accounting and financial accounting information.
Accounting systems are designed to
provide information to decisionmakers.
Cost
Financial
Accountin
Accountin
g System
g System
Provides
information to
decision-makers
external to the

Provides
information to
decision-makers
internal to the firm.

1-22

Accounting Systems
Continued

1-23

Financial Accounting reports financial

position and income according to Generally
Accepted Accounting Principles (GAAP).
Data should be
comparable across firms.

Cost Accounting measures, records

and reports information about
costs.
Data should be relevant for
decisions in a particular
firm.

Customers of Cost
Accounting

I love
II love
love
this
this
this
customer
custome
!
customer
r.
.

Individual who
purchases or uses
a commodity or a
service.

1-24

1-25

Customers of Cost
Accounting
Individuals
who use
the
informatio
n
provided.

Manager making
Managers
s
decisions
in the
firm.
Owner
Owners
s
evaluating

Trends in Cost
L.O. 4 Identify current trends in cost
accounting.
Accounting
High-Tech Production Settings

Just-in-Time
Method
Lean Production
Emphasis on
Quality
Benchmarkin
g

Activity-Based
Costing
Enterprise
Resource
Planning

Six
Performance Sigma
Measurement

1-26

High-Tech Production
Settings

Manufacturing
cost driven by
technology
rather than
labor.

1-27

1-28

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

Lean Production
A Lean Production
philosophy focuses
on:
Minimum
inventory
Quality
Efficiency
Flexibilit
y
Worker training

1-29

Emphasis on Quality
Quality as defined by the
customer
Organization is
managed to excel
on all dimensions.

1-30

Benchmarking
Benchmarking methods
measure products, services
and activities against the
best performance.
Benchmarking is an
ongoing process
resulting in
continuous
improvement.

1-31

Activity-Based Costing
(ABC)
ABC assigns costs
of activities
needed to make a
product then sums
the cost of those
activities to
compute a
products cost.

1-32

1-33

Enterprise Resource Planning

(ERP)
Purchasing

Production
Technology

Human
Resources

Finance

Information technology linking

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

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

A statistical
specification

1-34

Performance
Measurements
Performance
measurements indicate
how well a process is
working.

Balanced
Scorecardmeasurement relying on
A performance
multiple financial and nonfinancial
measures of performance.

1-35

Financial Players in the

Organization
Chief
Financial
Officer (CFO)

Controller

Treasure
r

Internal
Auditor
Cost Accountant

1-36

Financial Players in the

Organization
Manages the entire
Chief
Financial
Officer (CFO)

accounting and finance

function.

Manages liquid assets

Controller

Treasure
r
Plans and designs

information and incentive

systems.
Ensures compliance with
laws, regulations, and
Internal
company policies and
Auditor
procedures.
Records,
measures,
Cost Accountant
estimates and

1-37

Ethical Issues For

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

Many accountants or business

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

1-38

You Discover Unethical

Conduct
Follow the organizations 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.

1-39

Sarbanes-Oxley Act of 2002

Whats
the
intent?

Address
problems of
corporate
governance

Who is
impacted
?

Accounting
Firms
Corporation
s

Corporation
s?

Corporate
Responsibility

1-40

Corporate Responsibility
Who is
impacted
?

What is
the
impact?

CEO
Chief
Executive
Officer
Manages the
entire corporation.

1-41

CFO
Chief
Financial
Officer

Manages the entire

accounting and
finance function.

Sign financial reports and stipulate that financial

statements do not omit material information.
Disclose evaluation of the companys
internal controls.
Disclose notification of any fraud involving
management to Auditors, Audit Committee and Board
of Directors.

1-42

Appendix
Institute of
Management
Accountants Code of
IMA Code
of
Ethics
Ethics

Competence
Integrit
y

Confidentialit
y
Objectivit
y

Competence
Members 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.

1-43

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.

1-44

Integrity
Members have a
responsibility
Avoid actual orto:
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 organizations 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.

1-45

Objectivity
Members have a
responsibility to:
Communicate information
fairly and objectively.
Disclose fully all relevant information that
could reasonably be expected to influence
an intended users understanding of the
reports, comments, and recommendations
presented.

1-46

Chapter 1
Should I
expand or
not?

1-47