Chapter 1:

Introduction to Cost
Accounting
Cost Accounting:
Foundations and Evolutions, 8e
Kinney Raiborn

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Learning Objectives
What are the relationships among financial, management, and cost
accounting?
What are the the sources of authoritative pronouncements for the
practice of cost accounting?
What are the sources of ethical standards for cost accountants?
What is a mission statement, and why is it important to
organizational strategy?
What must accountants understand about an organizations
structure and business environment in order to perform effectively in
that organization?
What is a value chain, and what are the major value chain
functions?
How is a balanced scorecard used to implement an organizations
strategy?
Why is ethical behavior so important in organizations?

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Accountants
Financial accountants provide information to
external parties
Investors
Creditors
Regulators
Managerial accountants provide information to
internal users
Managers
Cost accountants provide information to both
internal and external users
Product cost information

Accounting is the language of business.

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Relationship of Financial,
Management, and Cost Accounting
Product
Costs

FINANCIAL COST MANAGEMENT

ACCOUNTING ACCOUNTIN ACCOUNTING
G

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Types of Accounting

Financial Management
Meet external Meet internal
information needs information needs
Comply with GAAP Does not have to
comply with GAAP

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Financial versus Managerial

Financial Managerial
External focus Internal focus
Whole organization Segments or divisions
Historical Current/projected
Quantitative Quantitative/qualitative
Monetary Monetary and nonmonetary
Verifiable Timely/reasonable estimate
GAAP Benefits exceed costs
Formal recordkeeping Formal and informal
recordkeeping

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Product Cost Information

External partiesstockholders, creditors, and

regulators
For investment and credit decisions
Complies with GAAP
Enterprise focus
Internal parties
Planning, controlling, and decision making
Evaluating performance
Includes upstream and downstream costs
Disaggregated
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Accounting Bodies

Financial Management
Public Company Institute of

Accounting Oversight Management

Board (PCAOB) Accountants (IMA)
Securities and Society of Management

Exchange Commission Accountants of Canada

(SEC) Cost Accounting
Financial Accounting Standards Board
Standards Board (CASB)
(FASB)

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Management Accounting
Organizations
IMA
Statements on Management Accounting
(not legally binding)
Society of Management Accountants of
Canada
Management Accounting Guidelines
(not legally binding)
Cost Accounting Standards Board (CASB)
Government contracting standards
(legally binding)

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Professional Ethics

Earnings managementdeliberate
accounting adjustments to hit profit targets
Often adjustments involve cost accounting
Product costs
Inventory valuations
Stretching legitimate accounting techniques
Outright fraud

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Ethics and Legislation

Sarbanes-Oxley ActCEOs and CFOs

personally accountable for the accuracy of
their organizations financial reporting
False Claims Actwhistle-blower protection
and penalties for failure to blow the whistle
(disclose known financial frauds)

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Ethics and Management Accounting

Standards of Ethical Conduct for

Management Accountants
Competence
Confidentiality
Integrity
Credibility

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Organizational Strategy

1. Develop mission statement

2. Implement strategy
3. Deploy resources to create value for
customers and shareholders
4. Recognize that each organization is unique
thus unique strategies must be developed

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 Organizational Strategy
1. Develop mission statement
2. Implement strategy

Develop,
Establish implement, and
appropriate monitor
measures of necessary
accomplishment information
systems
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Five Factors in Organizational
Strategy
Core competencies
Organizational structure
Management style and organizational culture
Organizational constraints
Environmental constraints

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 Organizational Strategies
Core competencycritical function or
activity providing a competitive advantage
Cost leadership strategyundercut
competitor prices
Product differentiation strategysuperior
quality products or unique services sold at
a premium

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Strategy Questions
Who are your five most important
What are your customers most
competitors? important purchase criteria?
Is your firm more or less profitable How do you and your competitors
than these firms? rate on these purchase criteria?
Compare prices for equivalent What are your main strengths and
products/services. competencies? Are they appreciated
Are they higher or lower? Explain by the market?
the difference. Is it customers,
costs, or profit requirements?
Which are your priority segments?
Are your costs higher or lower than Where is it most important that you
those of main competitors? Where gain market share?
are the differences most What is your competitive advantage?
pronounced?
What segment(s) of your business
represents 80% profits?
For each business segment above,
how large are you relative to the
largest competitors? Are you gaining
or losing relative market share?
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Organizational Structure
Distribution of authority and responsibility in an
organization
Authorityright to use resources to accomplish a

task or achieve an objective

Responsibilityobligation to accomplish a task or

achieve an objective
Line manager works directly toward attaining
organizational goals
Staff employees give assistance and advice to line
managers
Treasurer and Controller

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Value Chain
A set of value-adding functions and
processes that converts inputs into
products or services
Research and Marketing
Development Distribution
Product Design Customer Service
Supply
Production

Communicate strategy to all members of the value chain.

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Components of the Value Chain

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Balanced Scorecard

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Balanced Scorecard Perspectives
Learning and Growth
Use the organizations intellectual capital to adapt to changing
customer needs or to influence new customers needs and
expectations through product or service innovations
Internal Business
Things to do well to meet customer needs and expectations
Customer Value
How well the organization is doing relative to important
customer criteria
Financial
Address stockholders/stakeholders concerns about
profitability and organizational growth

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Balanced Scorecard Measures

Short-term and long-term

Internal and external
Financial and nonfinancial

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Ethics in Multinationals

Foreign Corrupt Practices Actprohibits

bribes to obtain/retain business
Organization of Economic Cooperation and
Development Conventioncrime to offer,
promise, give bribes to obtain/retain internal
business deals

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Questions

What is the relationship among financial,

management, and cost accounting?
How is the balanced scorecard used to
implement an organizations strategy?
Where can an accountant find ethical
standards for cost accounting?

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Potential Ethical Issues

Earnings management
Low-cost production at any cost
Whistle-blower retaliation
Fixing prices
Bribery and other corruption
Hiding managerial acts

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.