IE 618 Spring 2013 Slide content extracted from Hansen, Mowen, & Guan

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1 IE 618 Spring 2013 Slide content extracted from Hansen, Mowen, & Guan 1

2 (c) 2013 Cengage Learning 1

3 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 3

4 IE 618 Spring 2014 IE 618 Spring 2013 Slide content extracted from Hansen, Mowen, & Guan 4

5 Team Project IE 618 Spring 2013 Slide content extracted from Hansen, Mowen, & Guan 5

6 Corporate Profiles IE 618 Spring 2013 Slide content extracted from Hansen, Mowen, & Guan 6

7 Introduction to Cost Management 7

8 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

9 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 1 9

10 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

11 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

12 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

13 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 2 13

14 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 2 14

15 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 2 15

16 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 2 16

17 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 2 17

18 Time as a Compe&&ve Element Factors Affecting Cost Management 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 2 18

19 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 3 19

20 The role of today s Cost and Management Accountant Objec;ve 20 3

21 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

22 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 3 22

23 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 3 23

24 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 4 24

25 Certification 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 5 25

26 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 5 26

27 Basic Cost Management Concepts 2

28 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

29 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

30 A Systems Framework Objec;ve 1

31 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

32 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 A Systems Framework 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

33 A Systems Framework Objec;ve 1

34 A Systems Framework Objec;ve 1

35 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

36 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

37 Cost Assignment: Direct Tracing, Driver Tracing and Allocation Objec;ve 2

38 Product and Service Costs 3 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

39 Product and Service Costs Objec;ve 3

40 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

41 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

42 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

43 Product and Service Costs Objec;ve 3

44 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

45 Income Statement: Manufacturing Firm Manufacturing Organization Income Statement For the Year Ended December 31, 2010 Sales $ 2,000,000 Less: Cost of Goods Sold 1,300,000 Gross margin $ 700,000 Less operating expenses: Research and development $ 100,000 Selling 300,000 Administrative 150, ,000 Operating income $ 150,000 From the Cost of Goods Sold Schedule 45

46 46 Statement of Cost of Goods Manufactured

47 Cost of Goods Sold Schedule

48 Traditional and Activity-Based Cost Management Systems Tradi&onal Cost Management Systems Tradi&onal Cost Accoun&ng 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

49 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

50 Traditional and Activity-Based Cost Management Systems Objec;ve 5

51 Traditional and Activity-Based Cost Management Systems Comparison of Traditional and ABC Systems Objec;ve 5

52 Traditional and Activity-Based Cost Management Systems Trade-Off Between Measurement and Error Costs Objec;ve 5

53 Traditional and Activity-Based Cost Management Systems Shifting Measurement and Error Costs Objec;ve 5

54 End of Chapter 2 54