Lecture 01

Introduction to Cost and Management Accounting

Md. Shawfiqul Islam (MSI)

MBA (HRM), BBA (MGT Studies)
Lecturer, Dept. of Management Studies
Jagannath University, Dhaka
shawfiqul@mgt.jnu.ac.bd 01913079059
 Learning Objectives
1. Distinguish financial accounting from management accounting
2. Understand how management accountants affect strategic decisions
3. Describe the set of business functions in the value chain and identify
the dimensions of performance that customers are expecting of
companies
4. Explain the five-step decision making process and its role in
management accounting
5. Describe three guidelines management accountants follow in
supporting managers
6. Understand how management accounting fits into an organizations
structure
7. Understand what professional ethics mean to management accountants
 Distinguish Financial Accounting from
Management Accounting
Who is a Manager?
A person responsible for carrying out the activities (POLC) directed at an
organization's resources with the aim of achieving organizational goals in an
efficient and effective manner
Types: Production, Distribution, Marketing, Finance, HR

Levels: top, mid, lower, non-technical

Skills: conceptual, interpersonal, technical

Roles: interpersonal, informational, decisional

Distinguish Financial Accounting from Management Accounting

Accounting
Accounting is an information system that identifies , records &
communicates the economic events of an organization to the
interested users.
Provides information to external parties
Stockholders, creditors, regulators

Provides information to internal decision makers

To plan, control, and evaluate performance
Distinguish Financial Accounting from Management Accounting

Accounting Can Be Broadly Divided Into Three Branches:

1. Financial Accounting
2. Managerial Accounting
3. Cost Accounting
 Distinguish Financial Accounting from Management Accounting

Financial Accounting
The field of accounting that provides economic and financial
information for investors, creditors, and other external users.
It measures and records business transactions and provides financial
statements that are based on generally accepted accounting principles
(GAAP)
It is concerned with providing information to external users-
Shareholders (Existing & Potential)
Creditors (Suppliers and Bankers)
Financial Analyst
Labor Union
Government Authorities & the Likes
 Distinguish Financial Accounting from Management Accounting
Cost Accounting
Cost accounting basically deals with the cost related information to
calculate the per unit cost of product or services as well as cost control.
Cost related information are:
i ). Material
ii). Labour
iii). Overhead expense
Main purpose of cost accounting is determining the cost of product
& services and controlling the cost.
 Distinguish Financial Accounting from Management Accounting
Management Accounting
Measures, analyzes, and reports financial and nonfinancial information that helps
managers make decisions to fulfill the goals of an organization
Concern with providing of information to the management for controlling and
decision making.
Used to coordinate product design, production, and marketing decisions.
Managers use management accounting information to develop, communicate, and
implement strategy
Information and reports do not have to follow set principles or rules.
The key questions are always
(1) how will this information help managers do their jobs better, and
(2) do the benefits of producing this information exceed the costs?
Distinguish Financial Accounting from Management Accounting

Types of Accounting
Financial Accounting Management Accounting
Meets external information needs Meets internal information needs
Complies with GAAP Provides product costing information

Cost accounting
Provides information for both management accounting and financial
accounting
Measures and reports financial and nonfinancial information relating to the
cost of acquiring or utilizing resources in an organization
Includes those parts of both management accounting & financial accounting
in which cost information is collected and analyzed
Difference Between Management Accounting and Financial Accounting

Relationship of Financial, Management, and Cost Accounting

COST MANAGEMENT
FINANCIAL
ACCOUNTING ACCOUNTING
ACCOUNTING
 Difference Between Cost Accounting and Financial Accounting
Cost Accounting
Meaning Cost Accounting is a process of
ascertaining the cost
Objects The primary object of Cost
accounting is to determine the
records, cost of products and
services.
Scope The scope of Cost accounting is not
wide, it is apart of Managerial
accounting
Principles Under this system of cost
accounting certain principles are
followed.
Parties Both parties, internal and external
have interested in costing
Managerial Accounting
Managerial accounting is one which enables
management in doing its functions efficiently.
Managerial accounting aims at representing
cost data or accounting information for
management use.
Managerial accounting has wider scope. It
includes Financial accounting, Cost
accounting and statistics etc.
No principles is followed under the system of
managerial accounting.
Managerial accounting is specially designed
for management or internal use.
 Difference Between Management Accounting and Financial Accounting

Management Accounting Financial Accounting

Purpose of Help managers make decisions to fulfill Communicate organizations financial

information an organizations goals position to investors, banks, regulators, and
other outside parties

Primary users Managers of the organization External users such as investors, banks,
regulators, and suppliers

Focus and Future-oriented (budget for 2011 Past-oriented (reports on 2010 performance
emphasis prepared in 2010) prepared in 2011)
 Management Accounting Financial Accounting

Rules of Internal measures and reports do not Financial statements must be prepared in
measurement have to follow GAAP but are based on accordance with GAAP and be certified by
and reporting cost-benefit analysis external, independent auditors
Time span Varies from hourly information to 15 to Annual and quarterly financial reports,
and type of 20 years, with financial and nonfinancial primarily on the company as a whole
reports reports on products, departments,
territories, and strategies
Behavioral Designed to influence the behavior of Primarily reports economic events but also
implications managers and other employees influences behavior because managers
compensation is often based on reported
financial results
 Strategic Decisions for Management Accountants

Strategy specifies how an organization matches its own capabilities

with the opportunities in
the marketplace to accomplish its objectives
Strategy describes how an organization will compete

How do management accountants support strategic

decisions?
 Strategic Decisions for Management Accountants (cont.)
Strategic cost management describes cost management that specifically
focuses on strategic issues.
Who are our most important customers, and how can we be
competitive and deliver value to them?
What substitute products exist in the marketplace, and how do they
differ from our product in terms of price and quality?
What is our most critical capability? Is it technology, production, or
marketing?
Will adequate cash be available to fund the strategy, or will additional
funds need to be raised?
# A series of independent situations in which a firm is about to make a
strategic decision follow. Decisions:
a. Roger Phones is about to decide whether to launch production and
sale of a cell phone with standard features.
b. Computer Magic is trying to decide whether to produce and sell a new
home computer software package that includes the ability to interface
with a sewing machine and a vacuum cleaner. There is no such software
currently on the market.
c. Christina Cosmetics has been asked to provide a store brand lip
gloss that will be sold at discount retail stores.
d. Marcus Meats is entertaining the idea of developing a special line of
gourmet bologna made with sun dried tomatoes, pine nuts, and artichoke
hearts.
For each decision, state whether the company is following a low
price or a differentiated product strategy
Business Functions in the Value Chain
 Business Functions in the Value Chain (cont.)
Research and development (R&D)Generating and experimenting
with ideas related to new products, services, or processes.
Design of products and processesDetailed planning, engineering,
and testing of products and processes.
ProductionProcuring, transporting and storing (also called inbound
logistics),
coordinating, and assembling (also called operations) resources to
produce a product or deliver a service.
Marketing (including sales)Promoting and selling products or
services to customers or prospective customers.
DistributionProcessing orders and shipping products or services to
customers (also called outbound logistics).
Customer serviceProviding after-sales service to customers. e.g.,
support on the Internet, telephone line, and warranty repair work.
Demonstration: Campbell Soup Company incurs the following costs:
a. Purchase of tomatoes by a canning plant for Campbells tomato soup products-P
b. Materials purchased for redesigning Pepperidge Farm biscuit containers to make
biscuits stay fresh longer-DPP
c. Payment to Backer, Spielvogel, & Bates, the advertising agency, for advertising
work
on Healthy Request line of soup products-M
d. Salaries of food technologists researching feasibility of a Prego pizza sauce that
has minimal calories-R&D
e. Payment to Safeway for redeeming coupons on Campbells food products-M
f. Cost of a toll-free telephone line used for customer inquiries about using
Campbells soup products-CS
g. Cost of gloves used by line operators on the Swanson Fiesta breakfast-food
production line-P
h. Cost of handheld computers used by Pepperidge Farm delivery staff serving
major supermarket accounts-D
Classify each cost item (ah) as one of the business functions in the value
chain
# 1. Value chain and classification of costs, computer company. Compaq
Computer incurs the following costs:
a. Electricity costs for the plant assembling the Presario computer line of
products
b. Transportation costs for shipping the Presario line of products to a retail
chain
c. Payment to David Kelley Designs for design of the Armada Notebook
d. Salary of computer scientist working on the next generation of
minicomputers
e. Cost of Compaq employees visit to a major customer to demonstrate
Compaqs ability to interconnect with other computers
f. Purchase of competitors products for testing against potential Compaq
products
g. Payment to television network for running Compaq advertisements
h. Cost of cables purchased from outside supplier to be used with Compaq
printers
# 2. Value chain and classification of costs, pharmaceutical company. Merck,
a pharmaceutical company, incurs the following costs:
a. Cost of redesigning blister packs to make drug containers more tamperproof
b. Cost of videos sent to doctors to promote sales of a new drug
c. Cost of a toll-free telephone line used for customer inquiries about drug usage,
side effects of drugs, and so on
d. Equipment purchased to conduct experiments on drugs yet to be approved by the
government
e. Payment to actors for a television infomercial promoting a new hair-growth
product for balding men
f. Labor costs of workers in the packaging area of a production facility
g. Bonus paid to a salesperson for exceeding a monthly sales quota
h. Cost of Federal Express courier service to deliver drugs to hospitals
Classify each of the cost items (ah) as one of the business functions of the
value chain
Supply chain and its importance to Cost Management
Key Success Factor

Cost and efficiency

Quality
Time
Innovation
How can management accountants help improve
quality and achieve timely product deliveries?
# Grey Brothers Consulting has issued a report recommending changes for its newest
manufacturing client, Energy Motors. Energy Motors currently manufactures a single
product, which is sold and distributed nationally. The report contains the following
suggestions for enhancing business performance:
a. Add a new product line to increase total revenue and to reduce the companys overall
risk.
b. Increase training hours of assembly line personnel to decrease the currently high
volumes of scrap and waste.
c. Reduce lead times (time from customer order of product to customer receipt of
product) by 20% in order to increase customer retention.
d. Reduce the time required to set up machines for each new order.
e. Benchmark the companys gross margin percentages against its major competitors.
Link each of these changes to the key success factors that are important to
managers
Decision Making, Planning, and Control: The Five-Step Decision-
Making
Planning
Controlling
Decision-Making
1. Identify the problem and uncertainties
2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing among alternatives
5. Implement the decision, evaluate performance, and learn
# 1. Conner Company makes and sells brooms and mops. It takes
the
following actions, not necessarily in the order given. For each
action (ae) state whether it is a planning decision or a control
decision
a. Conner asks its marketing team to consider ways to get back market
share from its newest competitor, Swiffer.
b. Conner calculates market share after introducing its newest product.
c. Conner compares costs it actually incurred with costs it expected to
incur for the production of the new product.
d. Conners design team proposes a new product to compete directly
with the Swiffer.
e. Conner estimates the costs it will incur to sell 30,000 units of the new
product in the first quarter of next fiscal year.
# 2. Garnicki Foods makes frozen dinners that it sells through grocery
stores. Typical products include turkey dinners, fried chicken, and meat
loaf. The managers at Garnicki have recently introduced a line of
frozen chicken pies. They take the following actions decision.
a. Garnicki performs a taste test at the local shopping mall to see if
consumers like the taste of its proposed new chicken pie product.
b. Garnicki sales managers estimate they will sell more meat pies in their
northern sales territory than in their southern sales territory.
c. Garnicki managers discuss the possibility of introducing a new chicken pie.
d. Garnicki managers compare actual costs of making chicken pies with their
budgeted costs.
e. Costs for making chicken pies are budgeted.
f. Garnicki decides to introduce a new chicken pie.
g. To help decide whether to introduce a new chicken pie, the purchasing
manager calls a supplier to check the prices of chicken.
Classify each of the actions as a step in the five-step decision-making process
a. June 2011: Raised subscription fee to $25.50 per month from July 2011 onward. The
budgeted number of subscribers for this monthly fee is shown in the following table.
b. June 2011: Informed existing subscribers that from July onward, monthly fee would
be $25.50.
c. July 2011: Offered e-mail service to subscribers and upgraded other online services.
d. Oct. 2011: Dismissed the vice president of marketing after significant slowdown in
subscribers and subscription revenues, based on July through September 2011 data in
the following table.
e. Oct. 2011: Reduced subscription fee to $22.50 per month from Nov. 2011 onward.
Key Management Accounting
Guidelines
Cost-Benefit Approach
Behavioral and Technical Considerations
Different Costs for Different Purposes
# 1. Management accounting guidelines. For each of the following items,
identify which of the management accounting guidelines applies: cost-
benefit approach, behavioral and technical considerations, or
different costs for different purposes.
1. Analyzing whether to keep the billing function within an organization
or outsource it
2. Deciding to give bonuses for superior performance to the employees in
a Japanese subsidiary and extra vacation time to the employees in a
Swedish subsidiary
3. Including costs of all the value-chain functions before deciding to
launch a new product, but including only its manufacturing costs in
determining its inventory valuation
4. Considering the desirability of hiring one more salesperson
5. Giving each salesperson the compensation option of choosing
either a low salary and a high-percentage sales commission or a
high salary and a low-percentage sales commission
6. Selecting the costlier computer system after considering two
systems
7. Installing a participatory budgeting system in which managers
set their own performance targets, instead of top management
imposing performance targets on managers
8. Recording research costs as an expense for financial reporting
purposes but capitalizing and expensing them over a longer
period for management performance evaluation purposes
9. Introducing a profit-sharing plan for employees
Organization Structure and the Management Accountant

Line management, such as production, marketing, and

distribution management, is directly responsible for attaining
the goals of the organization
Staff management, such as management accountants and
information technology and human-resources management,
provides advice, support, and assistance to line management.
 Line and Staff Relationships
Line positions are directly Staff positions support
related to achievement of and assist line positions.
the basic objectives of an A management
organization. accountant works as a
business partner of the
A plant manager plant manager by
responsible for investing preparing detailed
in new equipment. operating cost
comparisons of
alternative pieces of
equipment.
Where does the management accounting function fit into an organizations
structure?
 Where does the management accounting function fit into an organizations structure?

CFOthe executive responsible for overseeing the financial operations

of an organization.

The CFO is:

A member of top management.
Responsible for providing timely and relevant data for planning
and control activities.
Responsible for external financial reporting.
Where does the management accounting function fit into an organizations structure?

Responsibilities of the CFO

Controllership**includes providing financial information
for reports to managers and shareholders, and overseeing the
overall operations of the accounting system.
Global Financial Planning/Budgeting
Operations Administration
Profitability Reporting
Inventory
Royalties
General Ledger
Accounts Payable and Receivable
Subsidiary and Liaison Accounting
 Where does the management accounting function fit into an organizations structure?

Responsibilities of the CFO

Treasuryincludes banking and short- and long-term financing,
investments, and cash management
Risk managementincludes managing the financial risk of
interest-rate and exchange-rate changes and derivatives management
Taxationincludes income taxes, sales taxes, and international tax
planning
Investor relationsincludes communicating with, responding to,
and interacting with shareholders
Internal auditincludes reviewing and analyzing financial and other
records to attest to the integrity of the organizations financial reports
and to adherence to its policies and procedures
# 1. In this table, indicate () which executive is primarily
responsible for each activity.
Activity Controller CFO
- Managing accounts payable
- Communicating with investors
- Strategic review of different lines of businesses
- Budgeting funds for a plant upgrade
- Managing the companys short-term investments
- Negotiating fees with auditors
- Assessing profitability of various products
- Evaluating the costs and benefits of a new
product design
Values and Behaviors of Successful Management
Accountants

Working in cross-functional teams and as a business partner of

managers
Promoting fact-based analysis and making tough-minded, critical
judgments without being adversarial
Leading and motivating people to change and be innovative
Communicating clearly, openly, and candidly
Having a strong sense of integrity
 Professional Ethics
Ethical practices in business build trust and promote
productive relationships. They are necessary for the
functioning of a market economy.
Many companies and professional organizations, such as the
Institute of Management Accountants (IMA),
have written codes of ethics which
serve as guidelines for employees.
Ethical Behavior for Practitioners of Management
Accounting and Financial Management

Competence
1. Maintain an appropriate level of professional expertise by
continually developing knowledge and skills.
2. Perform professional duties in accordance with relevant
laws, regulations, and technical standards.
3. Provide decision support information and recommendations that
are accurate, clear, concise, and timely.
4. Recognize and communicate professional limitations or other
constraints that would preclude responsible judgment or successful
performance of an activity.
 Ethical Behavior for Practitioners of Management
Accounting and Financial Management
Confidentiality
Each practitioner has a responsibility to:
1. Keep information confidential except when disclosure is
authorized or legally required.
2. Inform all relevant parties regarding appropriate use of
confidential information. Monitor subordinates activities to
ensure compliance.
3. Refrain from using confidential information for unethical or
illegal advantage.
 Ethical Behavior for Practitioners of Management
Accounting and Financial Management
Integrity
Each practitioner has a responsibility to:
1. Mitigate actual conflicts of interest. Regularly communicate
with business associates to avoid apparent conflicts of interest.
Advise all parties of any potential conflicts.
2. Refrain from engaging in any conduct that would prejudice
carrying out duties ethically.
3. Abstain from engaging in or supporting any activity that
might discredit the profession.
 Ethical Behavior for Practitioners of Management
Accounting and Financial Management

Credibility
Each practitioner has a responsibility to:
1. Communicate information fairly and objectively.
2. Disclose all relevant information that could reasonably be
expected to influence an intended users understanding of the
reports, analyses, or recommendations.
3. Disclose delays or deficiencies in information, timeliness,
processing, or internal controls in conformance with
organization policy and/or applicable law.
Global company, ethical challenges. Bredahl Logistics, a U.S.
shipping company, has just begun distributing goods across the
Atlantic to Norway. The company began operations in 2010, but the
companys earnings are currently trailing behind its competitors and
Bredahls investors are becoming anxious. Some of the companys
largest investors are even talking of selling their interest in the shipping
newcomer. Bredahls CEO, Hamsen, calls an emergency meeting with
his executive team. Brehdals executive staff make the following
suggestions for salvaging the companys short-term operating results:
Which of the items are in violation of these ethics standards and
which are acceptable.
a. Stop all transatlantic shipping efforts. The start-up costs for
the new operations are hurting current profit margins.
b. Make deep cuts in pricing through the end of the year to generate
additional revenue.
c. Pressure current customers to take early delivery of goods before
the end of the year so that more revenue can be reported in this years
financial statements.
d. Sell-off distribution equipment prior to year-end. The sale would
result in one-time gains that could offset the companys lagging profits.
The owned equipment could be replaced with leased equipment at a lower
cost in the current year.
e. Record executive year-end bonus compensation for the current
year in the next year when it is paid after the December fiscal year.
f. Recognize sales revenues on orders received, but not shipped as of
the end of the year.
g. Establish corporate headquarters in Ireland before the end of the
year, lowering the companys corporate tax rate from 28% to 12.5%.
Ethical Behavior for Practitioners of Management Accounting and Financial
Management
Resolution of Ethical Conflict
Discuss the issue with your immediate supervisor except when it
appears that the supervisor is involved. If your immediate superior
is the CEO or equivalent, the acceptable reviewing authority may
be a group such as the audit committee, executive committee,
board of directors, board of trustees, or owners.
Clarify relevant ethical issues by initiating a confidential discussion
with an IMA Ethics Counselor or other impartial advisor to obtain
a better understanding of possible courses of action.
Consult your own attorney as to legal obligations and rights
concerning the ethical conflict.
 Corporate Social Responsibility (CSR)
Companies are responsible for producing financial results that
satisfy stockholders. However, they also have a corporate social
responsibility to serve other stakeholderssuch as customers,
employees, suppliers, communities, and environmental and
human rights advocateswhose interests are tied to the
companys performance.
Corporate social responsibility (CSR) is a concept whereby
organizations consider the needs of all stakeholders when
making decisions. CSR extends beyond legal compliance to
include voluntary actions that satisfy stakeholder expectations.
 Examples of Corporate Social Responsibilities
Companies should provide customers with:
Safe, high-quality products that are fairly priced.
Competent, courteous, and rapid delivery of products and
services.
Full disclosure of product-related risks.
Easy-to-use information systems for shopping and tracking
orders.
Companies should provide suppliers with:
Fair contract terms and prompt payments.
Reasonable time to prepare orders.
Hassle-free acceptance of timely and complete deliveries.
Cooperative rather than unilateral actions.
Companies should provide stockholders with:
Competent management .
Easy access to complete and accurate financial information.
Full disclosure of enterprise risks.
Honest answers to knowledgeable questions.
Companies and their suppliers should provide employees with:
Safe and humane working conditions.
Nondiscriminatory treatment and the right to organize and file
grievances.
Fair compensation.
Opportunities for training, promotion, and personal
development.
Companies should provide communities with:
Payment of fair taxes.
Honest information about plans such as plant closings.
Resources that support charities, schools, and civic activities.
Reasonable access to media sources.
Companies should provide environmental and human rights
advocates with:
Greenhouse gas emissions data.
Recycling and resource conservation data.
Child labor transparency.
Full disclosure of suppliers located in developing countries.
 Qs/As
1. How does management accounting differ from financial accounting?
2. Management accounting should not fit the straitjacket of financial
accounting. Explain and give an example.
3. How can a management accountant help formulate strategy?
4. Describe the business functions in the value chain.
5. Explain the term supply chain and its importance to cost
management.
6. Management accounting deals only with costs. Do you agree?
Explain.
7. How can management accountants help improve quality and achieve
timely product deliveries?
8. Describe the five-step decision-making process.
9. Distinguish planning decisions from control decisions.
10. What three guidelines help management accountants provide the most value
to managers?
11. Knowledge of technical issues such as computer technology is a necessary
but not sufficient condition to becoming a successful management
accountant. Do you agree? Why?
12. Where does the management accounting function fit into an organizations
structure?
13. Name the four areas in which standards of ethical conduct exist for
management accountants in the United States. What organization sets forth
these standards?
14. What steps should a management accountant take if established written
policies provide insufficient guidance on how to handle an ethical conflict?