What is the role of a code of ethics in guiding the behavior of an organization's global workforce. What are the main factors and constraints that affect an organization's strategy and why are these factors important.
INTRODUCING
Financial accounting is designed to meet external information needs and to comply with generally accepted accounting principles. Financial accounting must conform to generally accepted accounting principles (currently set by the Financial Accounting Standards Board [FASB], a private sector body).
Relationship of Financial and Management Accounting to Cost Accounting
Exhibit 1–2 depicts the relationship of cost accounting to the larger systems of financial and management accounting. The cost accounting overlap causes the financial and management accounting systems to articulate or merge to form an information network.
Management and Cost Accounting Standards
Ethics for Management Accountant Professionals
Commerce
The websites of manufacturers and dealers worldwide can be accessed by potential buyers 24 hours a day. Some of the many positives and negatives of e-commerce capabilities are shown in Exhibit 1-5.
Trade Agreements
In the world of banking and financial services, it is possible to pay bills, access balances, obtain loans and insurance, and trade shares. The rapid expansion of e-commerce illustrates the success of its positive effects and calls for correction of its negative aspects.
Globalization Considerations
7Miriam Jordan, "Debut of Competitive Diet Colas in India Leaves a Sour Taste," The Wall Street Journal (Julie bl. 10Texas Instruments, "The TI Ethics Quick Test," http://www.ti.com/corp/docs /company/citizen/ethics/quicktest.shtml(August 13, 1999).
Organizational Structure
Organizational Mission
At one end of the continuum is centralization, where top management retains all authority to make decisions. At the other end of the continuum is decentralization, where decision-making authority is distributed among many personnel in the organization, including lower-level managers and possibly line employees.
Core Competencies
Thus, a top management decision may be the location of a new department, while the day-to-day operational decisions of that department may be in the hands of the new department manager. Long-term strategic decisions for the division can be made by the division manager in conjunction with top management.
Organizational Constraints
One extension of the definition is that IC includes human, structural, and relationship capital.17 Human capital is reflected in the knowledge and creativity of an organization's workforce and is a source of strategic innovation and renewal. Structural capital does not “go home at night or quit and hire from a rival; it puts new ideas to work; and it can be used again and again to create value, just as a die can eradicate part after part.”18 Acquiring new technology is a way to create new strategic opportunities by enabling a company to do things better or faster to do – assuming the company has trained its human capital in using that technology.
Organizational Culture
In many respects, the customer element of relationship capital is the most valuable part of an organization's intellectual capital: without customers to purchase products and services, an organization would not need to use human or structural capital.
Environmental Constraints
Hold - this mission is aimed at protecting the market share and competitive position of the business unit. Once this concept is accepted, value chain members begin to realize that information must be shared by all entities in the value chain.
REVISITING
What activities or types of businesses would you include in the upstream (supplier) part of the value chain? Another important part of the management information and control systems is the cost management system.
Organizational Form, Structure, and Culture
Thus, a cost management system is essential to generate information for effective strategic resource management. When assessing the cost control system, the value aspects of the organizational culture are also extremely important.
Organizational Mission and Core Competencies
Supporting such a changed culture requires different types, quantities and distributions of cost management information. Thus, the cost management system plays an important role in providing a foundation for companies with an organizational culture that emphasizes total quality management.
Competitive Environment and Strategies
Knowing the foregoing information, management must analyze the cost-benefit trade-offs related to the design of the cost management system. ELEMENTS OF A COST MANAGEMENT SYSTEM A cost management system is composed of three primary elements: motivational.
Motivational Elements
Thus, the option's value is more related to long-term than to short-term organizational performance. Performance rewards for top management can consist of both short-term and long-term incentives.
Informational Elements
The information required to support decisions depends on the unique situational factors of the firm and its sub-units. Techniques such as relevant costing, quality cost management, job order and process costing, and cost-volume-profit analysis, discussed in later chapters, relate to the role of cost information in decision making.
Reporting Elements
What are feeder systems and why are they important in designing a cost management system. What is gap analysis and what role does it play in implementing a cost management system.
Retailers versus Manufacturers/Service Companies
Businesses that only deal with low or moderate conversion rates usually only have one inventory account (Merchandise Inventory). Service companies will have an inventory account for the supplies used in the conversion process and may have a Work in Process inventory account, but these companies usually do not have a Finished Goods inventory account because services typically cannot be stored.
Manufacturers versus Service Companies
A cost that varies in total in direct proportion to changes in activity is a variable cost. In contrast, a cost that remains constant in total within the relevant range of activity is considered a fixed cost.
Separating Mixed Costs
The fixed portion of the mixed costs is then found by subtracting the total variable costs from the total costs. The change in total mixed costs is equal to the change in activity times the variable costs per unit; the fixed cost element does not fluctuate with changes in activity.
Direct Material
For example, if a production department is specified as a cost object, the salary of the production department manager is direct. On the other hand, if the cost object is a sales territory and the production department operates in more than one territory, the production department manager's salary is indirect.
Direct Labor
Therefore, costs for overtime or on-call premiums are usually considered overhead rather than direct labor costs and allocated to all units. Soon managers may find that almost all direct labor costs are being replaced by a new cost of production—the cost of robots and other fully automated machines.
Overhead
In contrast, training expenditures are determined by management and may not vary regardless of the amount of deficient output produced in a given period. If the Orlando Magic had not renovated their concourse four years ago to accommodate an additional 2,000 seats,” says team CEO Pat Williams, “the Magic would have had to raise ticket prices to unsustainable levels.”
Why Overhead Costs Are Allocated
Overhead, on the other hand, must be accumulated over a period of time and allocated to the products produced or services rendered during that time. Cost allocation refers to the allocation of an indirect cost to one or more cost objects using a reasonable basis.
Predetermined Overhead Rates
This amount (if insignificant) must be closed to cost of goods sold or (if significant) distributed between work-in-progress inventory, finished goods inventory and cost of goods sold. Why is the amount of cost of goods manufactured different from the amount of cost of goods sold.
Value-Added versus Non-Value-Added Activities
A primary component of activity-based management is activity analysis. This is the process of studying activities to classify them and devise ways to minimize or eliminate activities that do not add value. In some cases, a company may wonder whether the time spent on packaging adds value.
Manufacturing Cycle Efficiency
The cost of the liter of orange juice and the plastic cup are unit level costs. Organization-level costs are not product-related, so they should only be deducted in total from net product revenue.
Two-Step Allocation
Activity-based costing systems indicate that significant resources are consumed by low-volume products and complex production operations. Many companies use an activity-based costing system to allocate corporate overhead costs to their revenue-producing units based on the number of reports, documents, customers, or other reasonable measures of activity.
Short-Term and Long-Term Variable Costs
Two important cost factors that cause variable costs to change in the long run, but which have traditionally been ignored, are product variety and product complexity. These items add overhead (such as warehousing, purchasing, setup, and inspections), so long-term variable costs tend to increase as the number and types of products increase.
Attribute-Based Costing
However, some general pointers can alert managers to the need to review the cost data provided by a conventional accounting system. The two main underlying assumptions that companies must consider before adopting ABC are that the costs in each cost pool (1) are driven by homogeneous activities and (2) are strictly proportional to the activity.12 If these assumptions are met, the following circumstances can suggests that the use of activity-based costing should be considered.
With Product Variety and Product Complexity
An ingredient analysis will generally reveal that 20 percent of the ingredients are used in 80 percent of the products. 16Pareto found that about 85 percent of Milan's wealth was held by about 15 percent of the people.
With Lack of Commonality in Overhead Costs
With Problems in Current Cost Allocations
With Changes in Business Environment
SOURCE: Michael Gering, "Activity-Based Costing and the Customer," Management Accounting (London) (April 1999), pp. What overhead costs should be allocated to each branch based on activity-based costing concepts.
Costing Systems
Before products can be costed, a determination must be made about (1) the product costing system and (2) the valuation method to be used. Process costing systems (covered in Chapters 6 and 7) allow the use of the weighted average cost flow or FIFO assumption.
Valuation Methods
JOB ORDER COSTS: DETAILS AND DOCUMENTS A job can be categorized based on the stage of the production cycle. The usual case, however, is that companies using a job order costing system only produce products that are in demand at the time.
Material Requisitions
Because a company using job order costing is manufacturing products to user specifications, jobs may occasionally require unique raw materials. When a job enters this stage, cost accumulation must begin using the main accounting document in a job order system—the job order cost sheet (or job cost record).
Job Order Cost Sheet
Employee Time Sheets
6Thomas Tyson, “The Use of Bar Coding in Activity-Based Costing, Journal of Cost Management (Winter 1991), p. Overhead is applied to ending work-in-process inventory so that the appropriate product cost can be transferred to Finished Goods Inventory.
Completion of Production
Work in Process Inventory—Cutting and Forming (Job #323) 290 Work in Process Inventory—Cutting and Forming (Other Jobs) 88. To apply overhead to Cutting & Forming work in progress in June using predetermined application rates.
Custom Systems: An Illustration of Job Costing Information
Job order costing can help determine which jobs are truly profitable and can help managers better monitor costs. A job order costing system was implemented to track the total cost per period and the total costs associated with each client.
Monihan’s Boatworks
Tobias, the sales manager, was sure that the biggest profits came from the company's biggest accounts. Until the president requested this information, no one had calculated the costs of recruiting each client or the travel, entertainment and other expenses associated with maintaining each client.
