Chapter 1: Cost

Accounting Fundamentals
COST ACCOUNTING: INFORMATION FOR
DECISION MAKING

The Value Chain

This is the set of activities that transforms raw resources into
the goods and services that end users purchase and consume and
the treatment or disposal of any waste generated by them.

Value-Added Activities
The value-added activities that the firms in the chain
perform are those activities that customers perceive as adding
utility to the goods or services they purchase.
Business Functions in the Value Chain

1. Research and development

2. Design of products, services or processes
3. Production
4. Marketing
5. Distribution
6. Customer service
ACCOUNTING AND THE VALUE CHAIN

• Cost Accounting in Research and Development

Companies partner with suppliers in the development stage
to ensure cost-effective designs for products.
• Cost Accounting in Design
The design of a product can have a significant impact on the
cost to manufacture it. Cost accountants help designers understand
the trade-off by using methods such as activity-based costing, which
considers the activities or processes that will be required to bring a
product to market.
ACCOUNTING AND THE VALUE CHAIN

• Cost Accounting in Purchasing

Companies partner with suppliers to increase the efficiency
in the supply chain. The use of cost accounting methods such as
target costing, activity-based costing, performance measures and
incentive systems that support teamwork helps firms manage their
partnerships to keep the supply chain “lean” and add value
throughout the chain.
• Cost Accounting in Production
Operations managers and financial accountants use cost
information in the production stage to understand and report the
costs of the multiple products produced.
ACCOUNTING AND THE VALUE CHAIN

• Cost Accounting in Marketing

Marketing managers require cost accounting information to
understand the profitability of different customer groups.
• Cost Accounting in Distribution
Managers use accounting information to determine where in
the supply chain value-added activities will take place.
ACCOUNTING AND THE VALUE CHAIN

• Cost Accounting in Customer Service

Many companies have adopted the concept of total quality
management (TQM), which means that the organization is managed
to excel on all dimensions and the customer ultimately defines
quality. Cost accountants help managers make decisions about
quality in two ways:
1. Cost of quality (COQ) systems identify the costs associated with
producing defective units as well as the lost sales associated
with poor quality products.
2. They provide information on the projected warranty claims.
COMPARISON OF FINANCIAL ACCOUNTING AND
MANAGEMENT ACCOUNTING

• Financial Accounting – involves the systematic recording of

business transactions, governed by a body of international
financial reporting standards (IFRS) leading to the preparation of
financial statements for the use of various interested parties,
internal as well as external.
- aimed primarily at external users
• Management Accounting – is concerned with providing financial
information to persons within the organization to enable them to
make informed judgments and effective decisions which further
the organization’s goals.
- aimed primarily at internal users
RELATIONSHIP OF COST ACCOUNTING TO
OTHER FIELDS OF STUDY

• Cost accounting is closely related to microeconomics.

• Cost accounting provides data for use in decision models for
finance, operations management, and marketing.
• Cost accounting also relates to motivational behavior because it is
used in planning and performance evaluation.
• Tools from statistics, mathematics and computer sciences are used
to perform cost analyses.
SCOPE OF MODERN COST ACCOUNTING

A costing system typically accounts for costs in two basic stages,

namely:
a. Cost accumulation – involves the collection of cost data in some
organized way by means of an accounting system.
b. Cost assignment – The costing system traces direct costs and
allocates indirect costs to designated cost objects
Primary Applications of Cost Accounting
Systems

1. Cost accounting systems provide data (e.g. financial

statements) for compliance with reportorial, contractual and
regulatory requirements
2. Obtaining information for planning and control and
performance evaluation
*Budgeting – one of the most commonly used tool for
planning and control
3. Analyzing the Relevant Information for Making Decision
Management and cost accountants help managers identify
what information is relevant and what information is irrelevant
when making decisions.
ORGANIZATIONAL ENVIRONMENT

• The cost accounting function is typically the responsibility of the

controller.
Title Major Responsibilities and Primary Duties Example Activities
Chief Financial Officer Managers entire finance and accounting • Signs off on financial
(CFO) function statements
• Determines policy on
debt versus equity
financing

Treasurer • Manages liquid assets • Determines where to

• Conducts business with banks and other invest cash balances
financial institutions • Obtains line of credit
• Oversees public issues of stock and debt
ORGANIZATIONAL ENVIRONMENT

Title Major Responsibilities and Primary Duties Example Activities

Controller Plans and designs information and incentive • Determines cost
systems accounting policies
• Maintains the
accounting records

Internal auditor • Ensures compliance with laws, regulations • Ensures that

and company policies and procedures
• Provides consulting and auditing services
within the firm
procurement rules are
followed
• Recommends policies
and procedures to
reduce inventory losses.
ORGANIZATIONAL ENVIRONMENT

Title Major Responsibilities and Primary Duties Example Activities

Cost accountant • Records, measures, estimates, and • Evaluates costs of
analyzes costs products and processes
• Works with financial and operational • Recommends cost-
manager to provide relevant information effective methods to
for decisions distribute products.
Thank you!