Cost Accounting:

Information for Decision Making

Chapter 1
Copyright 2011 by The McGraw-Hill Companies, I nc. All rights reserved. McGraw-Hill/I rwin
Value Chain
Value added activities
Non value added activities
The Value Chain describes a set of activities that
transforms raw materials and resources into the
goods and services end users purchase and consume.
L.O. 1 Describe the way managers use accounting
information to create value in organizations.
1 - 2
The Value Chain Components
Research &
Development
Design Purchasing
Marketing Distribution
Customer
Service
Production
LO1
1 - 3
Accounting Systems
Financial
accounting
Financial
position and
income
Reports
Cost
accounting
Information
about costs
Reports
L.O. 2 Distinguish between the uses and users of cost
accounting and financial accounting information.
1 - 4
Managerial Decisions
Individuals make decisions.
Decisions determine the performance
of the organization.
Managers use information from the accounting
system to make decisions.
Owners evaluate organizational and managerial
performance with accounting information.
L.O. 3 Explain how cost accounting information is used
for decision making and performance evaluation
in organizations.
1 - 5
Costs for Decision Making
Carmens Cookies has been making and selling
cookies through a small store downtown.
One of her customers suggests that she expand
operations and sell to wholesalers and retailers.
Should Carmen expand operations?
LO3
1 - 6
Carmens Cost Drivers
Driver Cost
Rent
Insurance
Labor
Ingredients
Number of stores
Number of cookies
LO3
1 - 7
Differential Costs, Revenues, and Profits
Sales revenue
Costs:
Food
Labor
Utilities
Rent
Other
Total costs

Operating profits
$6,300

1,800
1,000
400
1,250
1,000
$5,450

$ 850
$8,505
a

2,700
b
1,500
b
600
b
1,250
1,200
c
$7,250

$1,255
$2,205

900
500
200
-0-
200
$1,800

$ 405
(1) Status Quo
Original Shop
Sales Only
(2) Alternative
Wholesale & Retail
Distribution (3) Difference
Carmens Cookies
Projected 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
LO3
1 - 8
Responsibility Centers,
Revenues, and Costs
Carmen Diaz
President
Ray Adams
Vice-President
Retail Operations
Cathy Peterson
Vice-President
Wholesale Operations
LO3
1 - 9
Responsibility Centers, Revenues, and Costs
Carmens Cookies
Income Statement
For the Month Ending April 30
Sales revenue
Department costs:
Food
Labor
a

Utilities
Rent
Total department costs
Center margin
b

General and admin. costs:
General managers salary
c

Other (administrative)
Total general and admin. costs
Operating 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
Retail
Operations
Wholesale
Operations Total
(a) Includes department managers salaries but excludes Carmens salary
(b) The difference between revenues and costs attributable to a responsibility center
(c) Carmens salary
LO3
1 - 10
Responsibility Centers, Revenues, and Costs
Carmens Cookies
Retail Responsibility Center
Budgeted versus Actual Costs
For the Month Ending April 30
Food:
Flour
Eggs
Chocolate
Nuts
Other
Total food
Labor:
Manager
Other
Total labor
Utilities
Rent
Total cookie costs
Number 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
LO3
1 - 11
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.
1 - 12
Enterprise Resource Planning
Information technology linking various processes
of the enterprise into a single comprehensive
information system
Technology
Purchasing
Human
Resources
Marketing
Production
Finance
LO4
1 - 13
Ethical Issues for Accountants
The design of the cost accounting system has
the potential to be misused to defraud customers,
employees, or shareholders.
L.O. 5 Understand ethical issues faced by accountants
and ways to deal with ethical problems that you
face in your career.
1 - 14
Sarbanes-Oxley Act of 2002
What is the
intent?
Who is
impacted?
How are
corporations
impacted?
Address problem
of corporate
governance
Accounting firms
and
corporations
Corporate
responsibility
LO5
1 - 15
Appendix 1
Institute of Management Accountants (IMA)
Code of Ethics: Standards
1. Competence
2. Confidentiality
3. Integrity
4. Credibility
1 - 16
End of Chapter 1
Copyright 2011 by The McGraw-Hill Companies, I nc. All rights reserved. McGraw-Hill/I rwin