PowerPoint
Presentations for
Cornerstones of
Cost Accounting
First Canadian Edition
Adapted by
George Gekas
Ryerson University
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Copyright © 2013 Nelson Education Ltd.
BASIC COST
MANAGEMENT
CONCEPTS
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Accounting Information
Systems
11
• Accounting Information Systems
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Financial Accounting
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Produces outputs for external users such as
financial statements
Inputs and the rules and conventions governing
processes, generally accepted accounting
principles (GAAP), are defined by Canadian
Institute of Chartered Accountants (CICA),
provincial securities commissions, and International
Accounting Standards Board (IASB)
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Accounting Information
Systems
11
• Accounting Information Systems
• Cost Management Accounting
• Produces outputs for internal users such as
reports, schedules, and analyses
• Designed to cost services, products, and other
objects
• Used in planning and control and decision
making
• Criteria and formats set internally
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Accounting Information
Systems
11
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Cost Management
Information System
11
• Two Major Subsystems
• Cost Accounting Information System
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Assigns costs to individual products and services
Assists external financial reporting by valuing
inventories and determining cost of sales
Assignments must conform to external rules
Operational Control Information System
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Provides accurate and timely feedback concerning
performance
Improves profit by increasing customer value
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Cost Management
Information System
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Factors Affecting
Cost Management
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Global Competition
• The new competitive environment has increased the
demand not only for more cost information but also
for more accurate information.
• Vastly imported transportation and communication
has led to a global market for many manufacturing
and service firms.
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Factors Affecting
Cost Management
11
Growth of the Service Industry
• As the traditional industries have declined in
importance, the service sector of the economy
has increased in importance.
• Deregulation of many services has increased
competition in the service industry.
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Factors Affecting
Cost Management
11
Advances in IT and Manufacturing Environment
• Computers monitor and control operations.
• Operational system is fully integrated with
marketing and accounting data.
• Increased ability to accurately cost products
because of advances in computerized tools used.
• Emergence of e-commerce:
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Internet trading
Electronic data interchange (EDI)
Bar coding
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Factors Affecting
Cost Management
1
Advances in Management Environment
• Theory of Constraints
• Method used to continuously improve
manufacturing and nonmanufacturing activities
• Just-In-Time Manufacturing
• Demand-pull system that strives to produce a
product only when it is needed and only in
quantities demanded by customers
• Computer-Integrated Manufacturing
• Automation of the manufacturing environment
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Cost Assignment: Direct Tracing,
Driver Tracing, and Allocation
2
• Costs
• Sacrifices made to obtain goods or services
• as long as they remain unexpired, they are on
the balance sheet as an asset
• Expenses
•
Expired costs that are deducted from revenues on
the income statement
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Cost Assignment: Direct Tracing,
Driver Tracing, and Allocation
2
• Cost Objects
• Anything for which costs are measured and
assigned
• Some are tangible, such as the product we
make; others are not, such as activities we for
which we wish to accumulate cost information
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Cost Assignment: Direct Tracing,
Driver Tracing, and Allocation
2
Traceability: Costs can be assigned easily and
accurately, using a causal relationship
1. Direct tracing: Relies on physical observance of
causal relationships to assign costs to cost objects
2. Driver tracing: Relies on drivers as causal factors to
assign costs to cost objects
Allocation: Costs that cannot be traced are
considered indirect costs and are allocated
products in some predetermined way
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Product and Service Costs
3
• Tangible Products
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Goods produced by converting raw materials
into finished products
• Services
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Activities performed for or by a customer using
the service provider’s products or facilities
Three characteristics that separate them from
tangible products:
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Intangibility
Perishability
Inseparability
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Product and Service Costs
3
Direct Materials: Directly traceable to the goods or
services being produced
Example: Cost of wood in furniture
Direct Labour: Directly traceable to the goods or
services being produced
Example: Wages of assembly-line workers
Overhead: All other manufacturing costs
Example: Plant depreciation, utilities, property taxes,
indirect materials, indirect labour, etc.
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Product and Service Costs
3
Prime and Conversion Costs
• Prime Cost
• Sum of direct materials and direct labour
• Conversion Cost
• Sum of direct labour and overhead
•Hint: Never add prime cost and conversion cost or you
will have double-counted labour because it is included
in each definition!
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Product and Service Costs
3
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Product and Service Costs
3
Nonproduction Costs
(Period Costs)
• Marketing (selling) Costs
• Necessary to market, distribute, and service a product or
service
Example: Advertising, storage costs, and freight out
• Administrative Costs
• Associated with research, development, and general
administration of the organization that cannot reasonably
be assigned to either marketing or production
Example: Legal fees, salary of the chief executive officer
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Financial Statements
4
• Income Statement: Manufacturing Firm
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Prepared for external parties
Follows standard format
Referred to as an absorption-costing or full-costing
income statement because all manufacturing costs are
absorbed into the cost of goods
Cost of Goods Manufactured represents the total
manufacturing cost of goods completed during the period.
Work in Process consists of all partially completed unites
found in production at a given point in time (usually the end
of one period/beginning of the next).
Cost of Goods Sold is the manufacturing cost of all goods
that were sold during the period.
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The Role of Management
Accountant
The Controller
 Financial
4
The Treasurer
reports
 Tax planning and
reporting
 Performance reporting
 Internal auditing
 Budgeting
 Accounting systems
and internal controls
 Collection of cash
 Monitoring of cash
payments
 Monitors cash availability
 Short-term investments
 Short and long-term
borrowing
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Information for Planning,
Controlling, Continuous
Improvement, and Decision Making
4
Planning is the detailed formulation of future actions
to achieve a particular end. Planning requires setting
objectives and identifying methods to achieve those
objectives.
Controlling is the managerial activity of monitoring
a plan’s implementation and taking corrective action as
needed.
Feedback is information that can be used to evaluate
or correct the steps being taken to implement a plan.
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Information for Planning,
Controlling, Continuous
Improvement, and Decision Making
4
Continuous improvement is required in a
dynamic environment if a firm is to remain competitive
or to establish a competitive advantage.
Decision making is the process of choosing among
competing alternatives.
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Ethical Behaviour
5
Ethical behaviour involves choosing the right,
proper, and just action
Benefits of Ethical Behaviour
Can create customer and employee loyalty
 Long-term profitability
 Avoid litigation costs
The ten core ethical values for business include:
 Honesty, Integrity
 Fidelity, Fairness
 Responsibility, Accountability
 Reliability, Respect for others
 Pursuit of excellence

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Ethical Conduct and
Behaviour
5
Standards of Ethical Conduct
for Managerial Accountants
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Competence
• Confidentiality
• Integrity
• Credibility
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Professional Accounting
Designations-Certification
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CMA
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Main purpose was to establish management accounting as
a recognized, professional discipline, separate from the
profession of public accounting
CICA
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Responsibility of a CICA is to provide assurance concerning
the reliability of financial statements
CGA
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Focus is to recognize competencies in the full spectrum of
accounting
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End of
Chapter 1
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