Cost Accounting
Foundations and Evolutions
Kinney, Prather, Raiborn
Chapter 1
Introduction to Cost Accounting

(1 of 3)
• Describe the relationships among financial, management, and cost accounting
• Identify two common organizational strategies
• Describe the value chain and the major value chain functions

(2 of 3)
• Explain how a balance scorecard is used to implement an organization’s strategy
• Explain why accountants must understand the organization’s structure in order to perform effectively

(3 of 3)
• Identify the sources of ethical standards for cost accountants
• List the sources of authoritative pronouncements for the practice of cost accounting

• Provide information to external parties
– Stockholders, creditors, regulators
• Estimate the cost of products produced and services provided
• Provide information to internal decision makers
– To plan, control, and evaluate performance

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

Product Costs
FINANCIAL
ACCOUNTING
COST
ACCOUNTING
MANAGEMENT
ACCOUNTING

• External parties
- stockholders, creditors, regulators
– For investment and credit decisions
– Complies with GAAP
– Enterprise focus
• Internal parties
– Planning, controlling, decision making
– Evaluating performance
– Includes upstream and downstream costs
– Disaggregated

1. Develop Mission Statement
2. Implement strategy
3. Measure and control the value chain and managers’ performance
4. Set balance scorecard goals, objectives, and targets

1. Develop Mission Statement
– What an organization wants to accomplish
– How its products/services can meet customer needs
– Why the organization exists
– Used to develop an organization’s strategy
– Modify over time

2. Implement strategy
Strategy - A plan to fulfill goals and objectives by deploying resources to create value for customers and shareholders
Organization strategy is supported by business unit strategies

•
Cost leadership strategy - Undercut competitor prices
•
Product differentiation strategy - Superior quality products or unique services sold at a premium
•
Core competency
– critical function or activity providing a competitive advantage

3. Measure and control the value chain and managers’ performance
Set of value-adding functions and processes that convert inputs into products/services
– Research and Development
– Product Design
– Supply
– Production
– Marketing
– Distribution
– Customer Service
Communicate strategy to all members of the value chain

4. Set balance scorecard goals, objectives, and targets
Business outcomes are evaluated against performance targets

• Learning and Growth
• 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 Performance
– Stockholders/stakeholders concerns about profitability and organizational growth

• Distribution of authority and responsibility in an organization
– Authority – right to use resources to accomplish a task or achieve an objective
– Responsibility – obligation to accomplish a task or achieve an objective

• Sarbanes-Oxley Act – CEOs and CFOs personally accountable for the accuracy of their organization’s financial reporting
• Foreign Corrupt Practices Act – prohibits bribes to obtain/retain business
• False Claims Act – whistle-blower protection
• Organization of Economic Cooperation and
Development Convention
– crime to offer, promise, give bribes to obtain/retain internal business deals

• Standards of Ethical Conduct for
Management Accountants
– Competence
– Confidentiality
– Integrity
– Objectivity
Competence
Confidentiality
Integrity
Objectivity

Financial
• Public Company
Accounting Oversight
Board (PCAOB)
• Securities and
Exchange
Commission (SEC)
• Financial Accounting
Standards Board
(FASB)
Management
• IMA
• Society of
Management
Accountants of
Canada
• Cost Accounting
Standards Board
(CASB)

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)

• What is the relationship among financial, management, and cost accounting?
• How is the balance scorecard used to implement an organization’s strategy?
• Where can an accountant find ethical standards for cost accountants?