IE 618 Spring 2013…Slide content extracted from Hansen, Mowen, & Guan
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(c) 2013 Cengage Learning
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IE 618 – Spring 2014
Grade:
•  25 % Exam 1
•  25 % Exam 2
•  30 % Team Project
•  10 % Corporate Profiles
•  10 % Homework
•  Class Attendance and Participation
IE 618 Spring 2013…Slide content extracted from Hansen, Mowen, & Guan
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IE 618 – Spring 2014
IE 618 Spring 2013…Slide content extracted from Hansen, Mowen, & Guan
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Team Project
IE 618 Spring 2013…Slide content extracted from Hansen, Mowen, & Guan
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Corporate Profiles
IE 618 Spring 2013…Slide content extracted from Hansen, Mowen, & Guan
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Introduction to Cost
Management
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Chapter 1 Objectives
1.  Describe cost management and explain how it differs from financial accoun;ng. 2.  Iden;fy the current factors affec;ng cost management. 3.  Describe how management accountants func;on within an organiza;on. 4.  Understand the importance of ethical behavior for management accountants. 5.  Iden;fy the three forms of cer;fica;on available to internal accountants. 8
Financial Accounting
vs. Management Accounting:
A Systems Framework
Accoun&ng Informa&on System •  Consists of interrelated manual and computer parts •  Uses processes such as collec;ng, recording, summarizing, analyzing, and managing data to transform inputs into informa;on that is provided to users. Two major systems: •  The financial accoun;ng informa;on system •  The cost managerial accoun;ng informa;on system The biggest difference between the two is the targeted user. Objec;ve 19 Financial Accounting
vs. Management Accounting:
A Systems Framework
•  Accoun&ng informa&on systems •  Financial accoun&ng •  Produces outputs for external users. •  Follows rules and conven;ons such as those set by the SEC and FASB. •  Creates outputs such as financial statements. •  Cost management •  Produces outputs for internal users. •  Designed to cost services, products and other objects. •  Is used in planning and control and decision making. Criteria and formats set internally. •  Outputs include reports, schedules and analyses. Objec;ve 10
1 Cost Management
Accounting Information System
•  Two major subsystems of the Cost Management Accoun&ng Informa&on System •  Cost accoun&ng informa&on system •  Assigns costs to individual products and services. •  Assists external financial repor;ng by valuing inventories and determining cost of sales. These assignments must conform to external rules. •  Opera&onal control informa&on system •  Provides accurate and ;mely feedback concerning performance. •  Improve profit by increasing customer value. Objec;ve 11
1 Factors Affecting
Cost Management
Global Compe&&on •  The new compe;;ve environment has increased the demand not only for more cost informa;on but also for more accurate informa;on. •  Vastly improved transporta;on and communica;on has led to a global market for many manufacturing and service firms. Objec;ve 12
2 Factors Affecting
Cost Management
Growth of the Service Industry •  As the tradi;onal industries have declined in importance, the service sector of the economy has increased in importance. •  Deregula;on of many services has increased compe;;on in the service industry. Objec;ve 13
2 Factors Affecting
Cost Management
Advances in Informa&on Technology •  Computers are used to monitor and control opera;ons. •  The result is an opera;onal system that is fully integrated with marke;ng and accoun;ng data. •  Increased ability to accurately cost products because of advances in tools. •  Emergence of e-­‐commerce •  Internet trading •  Electronic data interchange •  Bar coding •  RFID technologies Objec;ve 14
2 Factors Affecting
Cost Management
Advances in Management Environment •  The theory of constraints is a method used to con;nuously improve manufacturing ac;vi;es and nonmanufacturing ac;vi;es. •  Just-­‐in-­‐1me manufacturing is a demand-­‐pull system that strives to produce a product only when it is needed and only in the quan;;es demanded by customers. •  Lean Manufacturing is the persistent pursuit and elimina;on of waste which simultaneously embodies respect for people. •  Computer-­‐integrated manufacturing is the automa;on of the manufacturing environment. Objec;ve 15
2 Factors Affecting
Cost Management
Customer Orienta&on •  Firms are compe;ng not only in terms of technology and manufacturing, but in the speed of delivery and response to deliver value to the customer. •  Companies must also sa;sfy the needs of internal customers, such as staff func;ons exist to support line func;ons. New Product Development •  Management recognizes that a high propor;on of produc;on costs are commiVed during the development and design stage of a new product. •  The requirement to control cost encourages the use of target cos1ng and ac1vity-­‐based management. Objec;ve 16
2 Factors Affecting
Cost Management
Total Quality Management •  Con;nual improvement and elimina;on of waste are the two founda;on principles that govern a state of manufacturing excellence. •  A philosophy of total quality management, in which managers strive to create an environment that will enable organiza;ons to manufacture perfect (fully compliant/
zero defect) products, has replaced the acceptable quality aZtudes of the past. Objec;ve 17
2 Factors Affecting
Cost Management
Time as a Compe&&ve Element •  Time is the crucial element in all phases of the value chain. •  Decreasing non-­‐value-­‐added ;me appears to go hand-­‐in-­‐hand with increasing quality. •  Objec;ve: increase value and responsiveness to customer needs Efficiency •  While quality and ;me are important, improving these dimensions without corresponding improvements in financial performance may be fu;le, if not fatal. •  Cost is a cri;cal measure of efficiency. •  Efficiency: “Doing Things Right” •  Effec;veness: “Doing the Right Things” Objec;ve 18
2 The Role of the
Management Accountant
Line posi1ons are posi;ons that have direct responsibility for the basic objec;ves of an organiza;on. Staff posi1ons are posi;ons that are suppor;ve in nature and have only indirect responsibility for an organiza;on’s basic objec;ves. Objec;ve 19
3 The role of today’s
Cost and Management Accountant
Objec;ve 20
3 The role of today’s
Cost and Management Accountant
The Controller Ø Financial reports Ø SEC repor;ng Ø Tax planning and repor;ng Ø Performance repor;ng Ø Internal audi;ng Ø Budge;ng Ø Accoun;ng systems and internal controls The Treasurer Ø Collec;on of cash Ø Monitoring of cash payments Ø Monitors cash availability Ø Short-­‐term investments Ø Short and long-­‐term borrowing Ø Issuing of capital stock Objec;ve 21
3 Information for Planning, Controlling,
Continuous Improvement,
and Decision Making
Planning is the detailed formula;on of future ac;ons to achieve a par;cular end. • Requires seZng objec;ves and iden;fying methods to achieve those objec;ves. Controlling is the managerial ac;vity of monitoring a plan’s implementa;on and taking correc;ve ac;on as needed. Feedback is informa;on that can be used to evaluate or correct the steps being taken to implement a plan. Objec;ve 22
3 Information for Planning, Controlling,
Continuous Improvement,
and Decision Making
Con1nuous improvement is required in a dynamic environment if a firm is to remain compe;;ve or to establish a compe;;ve advantage. A relentless pursuit to deliver more value to the customer; and, always searching for ways to increase efficiency through: waste reduc;on, quality improvement, cost reduc;on, non-­‐value added ac;vity elimina;on/reduc;on Decision making is the process of choosing among compe;ng alterna;ves Objec;ve 233 Accounting and Ethical Conduct
Benefits of Ethical Behavior ü  Can create customer and employee loyalty ü  Avoid li;ga;on costs Standards of Ethical Conduct for Management Accountants •  Competence •  Confiden;ality •  Integrity •  Credibility Objec;ve 244 Certification
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CMA: One of the main purposes of the CMA was to establish management accoun;ng as a recognized, professional discipline, separate from the profession of public accoun;ng. •
CPA: The responsibility of a CPA is to provide assurance concerning the reliability of financial statements. •
CIA: The focus of the CIA is to recognize competency in internal audi;ng rather than external audi;ng as with the CPA. Objec;ve 25
5 Certification
Four areas emphasized on the CMA exam: 1)  Business analysis 2)  Management accoun;ng and repor;ng 3)  Strategic management 4)  Business applica;ons Objec;ve 26
5 Basic Cost Management
Concepts
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Chapter 2 Objectives
1.  Describe a cost management informa;on system, its objec;ves, and its major subsystems, and indicate how it relates to other opera;ng and informa;on systems. 2.  Explain the cost assignment process. 3.  Define tangible and intangible products, and explain why there are different product cost defini;ons. 4.  Prepare income statements for manufacturing and service organiza;ons. 5.  Explain the difference between tradi;onal and contemporary cost management systems. 3
A Systems Framework
System: a set of interrelated parts that performs one or more processes to accomplish specific objec;ves •  Works by using processes to transform inputs into outputs that sa;sfy the system’s objec;ves An informa;on system is designed to provide informa;on to people in the company who might need it. Objec;ve 1 A Systems Framework
Objec;ve 1 A Systems Framework
Financial Accoun&ng Informa&on System •  Inputs: well-­‐specified economic events •  Processes: rules and conven;ons established by the SEC and FASB •  Outputs: financial statements for external users Cost Management Informa&on System •  Inputs and processes: set by management; not bound by externally imposed criteria •  Outputs: reports for internal users Objec;ve 1 A Systems Framework
The cost management informa1on system has three broad objec;ves that provide informa;on for: 1) Cos;ng services, products, and other objects of interest to management 2) Planning and control 3) Decision making The value chain is the set of ac;vi;es required to design, develop, produce, market, deliver, and provide post-­‐sales service for the products and services sold to customers. Objec;ve 1 A Systems Framework
Objec;ve 1 A Systems Framework
Objec;ve 1 Cost Assignment: Direct Tracing, 2
Driver Tracing and Allocation
•  Costs are sacrifices made to obtain goods or services. As long as they remain unexpired, they are on the balance sheet as an asset. •  Expenses are expired costs which are deducted from revenues on the income statement. •  Cost Objects are anything for which costs are measured and assigned. Some cost objects are tangible, such as the product we make; others are not, such as ac;vi;es for which we wish to accumulate cost informa;on. –  Example: A bicycle is a cost object when you are determining the cost to produce a bicycle –  Assigning costs accurately to cost objects is crucial …cost of resources used by a cost object Objec;ve 2 Cost Assignment: Direct Tracing,
Driver Tracing and Allocation
Traceability means that costs can be assigned easily and accurately, using a causal rela;onship. Methods of tracing: 1.  Direct tracing: relies on physical observance of causal rela;onships to assign costs to cost objects—ex: direct mat’l 2.  Driver tracing: relies on drivers as causal factors to assign costs to cost objects—ex: process energy consump5on Costs that cannot be traced are considered indirect costs and are allocated to products in some predetermined way. Note: whether direct or indirect cost depends on cost object-­‐-­‐
plant hea;ng/cooling Objec;ve 2 Cost Assignment: Direct Tracing,
Driver Tracing and Allocation
Objec;ve 2 Product and Service Costs
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•  Tangible products are goods produced by conver;ng raw materials into finished products. •  Services are ac;vi;es performed for a customer or by a customer using the service provider’s products or facili;es. Services have three characteris;cs that separate them from tangible products: •  Intangibility •  Perishability •  Inseparability Objec;ve 3 Product and Service Costs
Objec;ve 3 Product and Service Costs
Manufacturing Costs
(Production Costs)
Typically, the most important cost object is the output of the
organization: Product or Service…considered “product cost”
•  Direct materials are those materials that are directly traceable to the goods or services being produced. •  Example: The cost of wood in furniture. •  Direct labor is the labor that is directly traceable to the goods or services being produced. •  Example: Wages of assembly-­‐line workers. •  Overhead are all other manufacturing costs. •  Example: Plant deprecia5on, u5li5es, property taxes, indirect materials, indirect labor (plant security), etc. Objec;ve 3 Product and Service Costs
Prime and Conversion costs
•  Prime Cost is the sum of direct materials and direct labor. •  Conversion Cost is the sum of direct labor and overhead. • Note: Never add prime cost and conversion cost or you will have double counted labor because it is included in each defini5on! Objec;ve 3 Product and Service Costs
Nonproduction Costs
(Period Costs)
•  Marke1ng (selling) costs are the costs necessary to market, distribute, and service a product or service. •  Example: Adver5sing, storage, sales comm, and freight out. •  Administra1ve costs are the costs associated with research, development, and general administra;on of the organiza;on that cannot reasonably be assigned to either marke;ng or produc;on. •  Example: Legal fees, salary of the chief execu5ve officer. Note: R&D costs may be separate from Admin Costs are the costs necessary to create the underlying innova;on, prototypes & development the technologies for a product or service. Objec;ve 3 Product and Service Costs
Objec;ve 3 External Financial Statements
•  Income Statement: Manufacturing Firm •  Prepared for external par;es •  Follows standard format •  Is referred to as an absorp&on-­‐cos&ng or full-­‐cos&ng 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 par;ally completed units found in produc;on at a given point in ;me (usually the end of one period/
beginning of the next). •  Cost of Goods Sold (COGS) is the manufacturing cost of all goods that were sold during the period. Objec;ve 4 Income Statement: Manufacturing Firm Manufacturing Organization
Income Statement
For the Year Ended December 31, 2010
Sales
Less: Cost of Goods Sold
$ 2,000,000
1,300,000
Gross margin
Less operating expenses:
Research and development
Selling
Administrative
$
$ 100,000
300,000
150,000
Operating income
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550,000
$
From the Cost of
Goods Sold Schedule
700,000
150,000
Statement of Cost of Goods Manufactured 46
2.3 Cost of Goods Sold Schedule 47
Traditional and Activity-Based Cost
Management Systems
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Tradi&onal Cost Management Systems •
Tradi&onal Cost Accoun&ng
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Assumes all costs can be classified as fixed or variable with respect to changes in units or volume – called “unit-­‐based costs”. •
Allocates costs that are not unit-­‐based. •
Tradi&onal Cost Control •
Assigns costs to organiza;onal units and holds the unit manager responsible for controlling the assigned costs. •
Performance is measured by comparing actual outcomes with standard or budgeted outcomes. •
Emphasis is on financial measures of performance. Objec;ve 5 Traditional and Activity-Based Cost
Management Systems
•
Ac&vity-­‐Based Cost Management Systems •
Ac&vity-­‐Based Cost Accoun&ng •
Emphasizes tracing over alloca;on •
Iden;fies non-­‐unit-­‐based ac;vity drivers—unrelated to volume of products produced. Ex: material handling costs more accurately related to number of moves and not number of products moved. •
Flexible system capable of producing cost informa;on for a variety of purposes. •
Ac&vity-­‐based Cost Control •
Seeks to understand and control ac5vi5es rather than costs. •
Ac&vity-­‐based management (ABM) focuses on improving customer value. •
Looks at the process view and focuses accountability on ac;vi;es to maximize systemwide performance. Objec;ve 5 Traditional and Activity-Based Cost
Management Systems
Objec;ve 5 Traditional and Activity-Based Cost
Management Systems
Comparison of Traditional and ABC Systems
Objec;ve 5 Traditional and Activity-Based Cost
Management Systems
Trade-Off Between Measurement and Error Costs
Objec;ve 5 Traditional and Activity-Based Cost
Management Systems
Shifting Measurement and Error Costs
Objec;ve 5 End of Chapter 2
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