Information for Decision Making

1. Information for Decision Making Chapter 1

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

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

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

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

6. Design Value-Added Non Value-Added Developing and engineering the new product. Value Chain ? or

7. Production Value-Added Non Value-Added Producing the product. Value Chain ? or

8. Marketing Value-Added Non Value-Added Informing potential customers about the product. Value Chain ? or

9. Distribution Value-Added Non Value-Added Delivering the product to customers. Value Chain ? or

10. Customer Service CS Value-Added Non Value-Added Supporting customers who use the product. Value Chain ? or

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

12. Should Carmen expand operations? Are costs greater than benefits? What are Carmen’s cost drivers? What are Carmen’s differential costs? What are Carmen’s differential revenues? Carmen’s Cookies

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

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

15. FACTOR COST Cost Driver Rent Number of storefronts Insurance Labor Number of cookies Ingredients

16. Costs that change in response to a particular course of action. Differential costs differ between actions. Not expanding Expanding Differential Costs differ actions

17. Revenues that change in response to a particular course of action. Differential revenues differ between actions. Not expanding Expanding Differential Revenues differ actions

18. Differential Costs, Revenues & Profits

19. A financial plan for the revenues and resources needed to meet financial goals. Budget

20. Other 2,200 2,200 0 Actual to Budget Comparison

21. Other 1,500 1,500 0 Rent 5,000 5,000 0 Actual to Budget Continued

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

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

24. Individual who purchases or uses a commodity or a service. Customer Customers of Cost Accounting I love this customer. I love this customer. I love this customer! We love customers. We love happy customers. We love loyal customers.

25. Individuals who use the information provided. Managers making decisions in the firm. Owners evaluating managers. Customers of Cost Accounting Cost Accounting WHO ARE THE CUSTOMERS? Managers Owners

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

27. Manufacturing cost driven by technology rather than labor. High-Tech Production Settings More technology Less Labor

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

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

30. Quality as defined by the customer Organization is managed to excel on all dimensions. Emphasis on Quality Total Quality Management (TQM) Quality

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

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.

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

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

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

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

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

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

39. You Discover Unethical Conduct Now What? 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.

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

41. Who is impacted? What is the impact? Corporate Responsibility CEO CFO Chief Executive Officer Chief Financial Officer Manages the entire accounting and finance function. Manages the entire corporation. 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.

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

43. Competence 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.

44. Confidentiality 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.

45. Integrity 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.

46. Objectivity 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.

47. Chapter 1 Should I expand or not? The End