Information for Decision Making Chapter 1

1-2 Learning Objectives 1.Describe the way managers use accounting information to create value in organizations. 2.Explain how cost accounting information is used for decision making and performance evaluation in organizations. 3.Distinguish between the uses and users of cost accounting and financial accounting information. 4.Identify current trends in cost accounting. 5.Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.

1-3 Value Chain The value chain describes the activities that increase the value of an organization’s products or services. L.O. 1 Describe how managers use accounting information to create value in organizations.R&D Design Production Distribution MarketingCustomerService

1-4 Does this add value? Activities Evaluate each activity Non Value- Added Activity: Customers perceive no value. Can we eliminate the activity? Can we improve the activity? R&D Design Production Distribution MarketingCustomerservice Value Added Activity: Customers perceive as adding value. Does this add value? Value Added Activity: Customers perceive as adding value. Non Value- Added Activity: Customers perceive no value. Hmmmm…?

1-5 Value Chain Value-Added Creating a new product. Non Value-Added Research and Development R&D

1-6 Value Chain Developing and engineering the new product. Design Value-AddedNon Value-Added

1-7 Value Chain Production Producing the product. Value-AddedNon Value-Added

1-8 Value Chain Informing potential customers about the product. Marketing Value-AddedNon Value-Added

1-9 Value Chain Delivering the product to customers. Distribution Value-AddedNon Value-Added

1-10 Value Chain Supporting customers who use the product. Customer Service CS Value-AddedNon Value-Added

1-11 Managerial Decisions What adds value to the firm? L.O. 2 Explain how cost accounting information is used for decision making and performance evaluation in organizations.

1-12 Carmen’s Cookies Are costs greater than benefits? What are Carmen’s cost drivers? What are Carmen’s differential costs? What are Carmen’s differential revenues?

1-13 Cost Benefit Analysis Consider both the costs and benefits of a proposal. Is the cost greater than the benefit? Don’t Expand Expand

1-14 What drives my cost? Cost Driver These are estimates and require assumptions. Cost Drivers What are Carmen’s cost drivers? Factors that cause or cost Some may be realized Some may not be realized drive

1-15 Cost Driver Number of storefronts Rent Number of cookies Labor Ingredients Insurance

1-16 Costs that change in response to a particular course of action. Differential Costs differ Differential costs differ between actions. differ actions

1-17 Revenues that change in response to a particular course of action. Differential Revenues differ Differential revenues differ between actions. differ actions

1-18 Differential Costs, Revenues & Profits (1)(2)(3) Operating profits …….$850$1,255$405 Total costs …………….$5,450$7,250$1,800 Other …………………..1,0001,200 c 200 Rent …………………….1, Utilities ………………… b 200 Labor …………………..1,0001,500 b 500 CARMEN’S COOKIES Projected Income Statement For One Week a 35 percent higher than status quo b 50 percent higher than status quo c 20 percent higher than status quo Food ……………………1,8002,700 b 900 Costs …………………… Sales revenue ………...$6,300$8,505 a $2,205 Sales OnlyDistributionDifference Original ShopWholesale & Retail Status QuoAlternative

1-19Budget Other2,200 A financial plan for the revenues and resources needed to meet financial goals. Total Food12,900 Nuts1,900 Chocolate1,900 Eggs4,700 Flour$2,200 Food CARMEN’S COOKIES For the Month Ending April 30 Budgeted Costs Rent5,000 Total cookie costs$24,200 Utilities1,800 Total Labor4,500 Other1,500 Manager3,000 Labor Number of cookies32,000

1-20 Actual to Budget Comparison Difference Total Food$13,500$12,900$600 Nuts2,0001, Chocolate2,0001, Eggs5,2004, Flour$2,100$2,200$(100) Food ActualBudget(Variance) CARMEN’S COOKIES For the Month Ending April 30 Actual vs Budgeted Costs Number of cookies sold32,000 0 Costs 02,200 Other

1-21 Actual to Budget Continued Total cookie costs$24,800$24,200$600 Utilities1,800 0 Total Labor4,500 0 Manager3,000 0 Labor Difference ActualBudget(Variance) 01,500 Other 05,000 Rent

1-22 Accounting Systems L.O. 3 Distinguish between the uses and users of cost accounting and financial accounting information. Accounting systems are designed to provide information to decision-makers. Financial Accounting System Cost Accounting System Provides information to decision-makers external to the firm. Provides information to decision-makers internal to the firm.

1-23 Financial Accounting reports financial position and income according to Generally Accepted Accounting Principles (GAAP). Accounting Systems Continued Cost Accounting measures, records and reports information about costs. Data should be relevant for decisions in a particular firm. Data should be comparable across firms.

1-24 Customers of Cost Accounting Individual who purchases or uses a commodity or a service. I love this customer! I love this customer.

1-25 Customers of Cost Accounting Managers making decisions in the firm. Managers Individuals who use the information provided. Owners evaluating managers. Owners

1-26 Trends in Cost Accounting High-Tech Production Settings Just-in-Time Method Lean Production Emphasis on Quality Benchmarking Activity-Based Costing Six Sigma Performance Measurement L.O. 4 Identify current trends in cost accounting. Enterprise Resource Planning

1-27 High-Tech Production Settings Manufacturing cost driven by technology rather than labor.

1-28 Just-in-Time Method Units are produced or purchased just in time for use, keeping inventories at a minimum.

1-29 Lean Production Quality Efficiency Flexibility Worker training A Lean Production philosophy focuses on: Minimum inventory

1-30 Emphasis on Quality Organization is managed to excel on all dimensions. Quality as defined by the customer

1-31Benchmarking Benchmarking is an ongoing process resulting in continuous improvement. Benchmarking methods measure products, services and activities against the best performance.

1-32 Activity-Based Costing (ABC) ABC assigns costs of activities needed to make a product then sums the cost of those activities to compute a product’s cost.

1-33 Finance Enterprise Resource Planning (ERP) Information technology linking various systems of the enterprise into a single comprehensive information system. Technology Purchasing Production Human Resources

1-34 Six Sigma A system for improving quality that uses data to improve processes and prevent defects. A statistical specification

1-35 Performance Measurements Performance measurements indicate how well a process is working. Balanced Scorecard A performance measurement relying on multiple financial and nonfinancial measures of performance.

1-36 Financial Players in the Organization Chief Financial Officer (CFO) Treasurer Controller Internal Auditor Cost Accountant

1-37 Financial Players in the Organization Chief Financial Officer (CFO) Treasurer Controller Internal Auditor Cost Accountant Manages the entire accounting and finance function. Manages liquid assets Plans and designs information and incentive systems. Ensures compliance with laws, regulations, and company policies and procedures. Records, measures, estimates and analyzes costs.

1-38 Ethical Issues For Accountants Many accountants or business people have done small things, none of which appeared seriously wrong, but these small things added up to big trouble. L.O. 5 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.

1-39 You Discover Unethical Conduct Follow the organization’s established policies Discuss problems with the immediate superior, unless superior is involved. Submit the issue to the next higher managerial level. Submit the issue to an acceptable reviewing authority. Consider calling the confidential “hotline.” The final recourse if ethical misconduct still exists is to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization.

1-40 Sarbanes-Oxley Act of 2002 What’s the intent? Address problems of corporate governance Who is impacted? Accounting Firms Corporations Corporations? Corporate Responsibility

1-41 C hief F inancial O fficer CFO Corporate Responsibility Who is impacted? C hief E xecutive O fficer CEO Manages the entire accounting and finance function. Manages the entire corporation. What is the impact? Sign financial reports and stipulate that financial statements do not omit material information. Disclose evaluation of the company’s internal controls. Disclose notification of any fraud involving management to Auditors, Audit Committee and Board of Directors.

1-42Appendix Institute of Management Accountants’ Code of Ethics Competence Confidentiality Integrity Objectivity IMA Code of Ethics

1-43Competence Members have a responsibility to: Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills. Perform their professional duties in accordance with relevant laws, regulations, and technical standards. Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.

1-44Confidentiality Members have a responsibility to: Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so. Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality. Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.

1-45Integrity Members have a responsibility to: Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically. Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions. Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical objectives. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. Communicate unfavorable as well as favorable information and professional judgments or opinions. Refrain from engaging in or supporting any activity that would discredit the profession.

1-46Objectivity Members have a responsibility to: Communicate information fairly and objectively. Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented.

1-47 Chapter 1 Should I expand or not?