COST ACCOUNTING - Unit 1 SPB
COST ACCOUNTING - Unit 1 SPB
COST ACCOUNTING - Unit 1 SPB
CHAPTER I
Table of Contents
Learning Outcomes
The four basic functions of management are planning, organizing, coordinating or directing
and controlling. These functions work together in the creation, execution and realization of
organizational goal. The four functions of management can be considered a process where
each function builds on the previous functions.
A. Planning
Planning is the most fundamental of the management functions, and as such it logically
precedes all other functions. Planning is the projection of actions intended to reach specific
goals. In other words, a plan is a blueprint for the future; it is the expression of what we
wish to accomplish or the prediction of what might occur in the future. Planning begins with
the questions of what and why, then focuses on the how, when, who and where.
Benefits of Planning
1. Planning ensures that we work effectively and efficiently, or at the very least,
improves our chances of doing so. Planning reduces procrastination and wastage
of resources.
2. Planning is proactive. It decreases the need to manage from crisis to crisis.
Classification of Plans
1. Strategic plan: plans made for achieving long range goals and living up to the
expectations expressed in statements of mission and values.
2. Organizational plan: begins with a table of organization. It includes position
descriptions, staffing and channels of communication.
3. Physical plan: concerned with topography (layout of building or offices)
4. Functional plan: plans concerned with the workings of major functional units such
as human resource departments.
5. Operational plan: addresses systems, work processes, procedures, quality control,
safety and other supportive activities.
6. Financial plan: addresses the inflow and outflow of money, profit and loss, budgets,
cost and profit centers, charges and salaries.
B. Organizing
Organizing is the process of gearing up to implement decisions that result from the
planning process; in other words, it is the establishment of the structure in which the work
gets done. Organizing involves delineating tasks and establishing a framework of authority
and responsibility for the people who will perform these tasks. It further involves analyzing
the workload, distributing it among employees and coordinating the activities so that work
proceeds smoothly.
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A manager performs organizing function with the help of the following steps:
1. Identification of activities: all the activities which have to be performed in a concern
have to be identified first. Example: preparation of accounts, making sales and record
keeping. These activities have to be grouped and classified into units.
2. Departmentally organizing the units: the manager tries to combine and group similar
and related activities into units or departments. The process of dividing the
organization into departments or independent units is called departmentalization.
3. Classifying the authority: Once the departments are made, the manager likes to
classify the powers and its extent to the managers. This activity of giving a rank in
order to the managerial positions is called hierarchy. The top management is into
formulation of policies, the middle level management into departmental supervision
and lower level management into supervision of foremen. The clarification of authority
help in bringing efficiency in the running of a concern.
4. Co-ordination between authority and responsibility: relationships are established
among various groups to enable smooth interaction toward the achievement of the
organizational goal. Each individual is made aware of his authority and he knows
whom they have to take orders from, to whom they are accountable and to whom they
have to report. A clear organizational structure is drawn and all the employees are
made aware of it.
C. Coordinating or Directing
Coordinating is the process of synchronizing activities and participants so that they
function smoothly with each other. When coordination fails, conflict and confusion run
rampant. Proactive coordinating involves activities intended to anticipate and prevent
problems. Reactive coordinating consists of regulatory activities aimed at the
maintenance of existing structural and functional arrangements and corrective
activities that rectify errors after they have occurred.
Tools of Coordination
1. Committees: a major purpose of committee is to increase coordination. The
strength of committee action comes through a synthesis of divergent viewpoints.
2. Coordinators
D. Controlling
Controlling simply means follow-up and correction. It is the process of
evaluating the execution of the plan and making adjustments to ensure that the
organizational goal is achieved. During the controlling stage managers performs tasks
such as training employees as necessary and managing deadlines. Managers monitor
employees and evaluate the quality of their work.
Part of the control process includes preparing performance reports. A
performance report compares budgeted data to actual data in an effort to identify and
learn from excellent performance and to identify and eliminate sources of
unsatisfactory performance.
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make in resource planning while break even analysis, projected financial statements
are examples of useful tools in profit planning.
Activity 1
1. How do managers make decisions to implement strategy?
2. Distinguish between the planning and control decisions of managers
3. Describe three ways management accountants support managers
A. Management Accounting
Management accounting measures, analyzes, and reports financial and
nonfinancial information that helps managers make decisions to fulfill the goals of an
organization.
Managers use management accounting information to develop, communicate,
and implement strategy. They also use management accounting information to
coordinate product design, production, and marketing decisions and to evaluate
performance. Management accounting information and reports do not have to follow
set principles or rules. The key questions are always (1) how will this information help
managers do their jobs better, and (2) do the benefits of producing this information
exceed the costs?
Management accounting information is not required to adhere to GAAP and
thus can provide both historical and forward-looking information to managers.
Management accounting information commonly addresses individual or divisional
concerns rather than those of the firm as a whole.
B. Financial Accounting
Financial accounting focuses on reporting to external parties such as investors,
government agencies, banks, and suppliers. It measures and records business
transactions and provides financial statements which requires compliance with GAAP
established by the FASB, the IASB, and the SEC (or other influential organizations
such as the APB and the AICPA). Financial accounting information is typically
historical, quantitative, monetary, and verifiable and usually reflects the activities of the
whole organization.
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C. Cost Accounting
Cost accounting information addresses the demands of both financial and
management accounting and is thus represented as the intersection of the financial
and management accounting systems.
Cost accounting supports the financial accounting system by providing product
cost information to external parties (stockholders, creditors, and various regulatory
bodies) for investment and credit decisions. For external reporting purposes, GAAP
defines product cost as the sum of the costs incurred within the factory to make one
unit of product.
Cost accounting supports the management accounting system by providing
product cost information to internal managers who are responsible for planning,
controlling, decision making, and evaluating performance.
Activity 2
Describe how cost accounting supports management accounting and
financial accounting
The controller (also called the chief accounting officer) is the financial executive
primarily responsible for management accounting and financial accounting. This book
focuses on the controller as the chief management accounting executive. Modern
controllers do not do any controlling in terms of line authority except over their own
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departments. Yet the modern concept of controllership maintains that the controller
exercises control in a special sense. By reporting and interpreting relevant data, the
controller influences the behavior of all employees and exerts a force that impels line
managers toward making better-informed decisions as they implement their strategies.
The main role of Treasurer is the fact that he identifies the financial official and then
looks at the task of financing and its own related activities. Treasury always handles liquid
assets therefore the primary role of treasurer is to look at the cash and its other liquid
investments.
All of the above mentioned functions of treasurer are integrated by making use of
cash manger, fund manager and credit supervisor.
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Activity 3
Describe how cost accounting supports management accounting and
financial accounting
IMA has been committed to advocating the highest standards of ethical business
practices—both for its members and the profession at large—since the organization was
founded in 1919. In the early 1980s, IMA took a bold leadership role in the area of ethics
by developing its first written code of ethics: Standards of Ethical Conduct of Management
Accountants. In 2005, in the wake of global financial scandals and an increasing need
for more direct ethical guidelines, IMA issued new guidance to better reflect the ethical
climate of the time. The result was the IMA Statement of Ethical Professional Practice,
which required each IMA member to be committed to the highest ethical behavior.
After considering the many changes in the business and regulatory environment,
including the globalization of commerce and the management accounting profession, IMA
determined to issue a revised Statement in 2017. More concise and simpler to understand
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and apply, this updated version more fully reflects the global scope of management
accounting. It also requires IMA members to contribute to a positive ethical culture in their
organization and to place integrity of the profession above personal interests. These
requirements recognize the need for members to take an active role in ensuring their
organization has a strong, open, and positive ethical culture.
Principles
IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and
Responsibility. Members shall act in accordance with these principles and shall encourage
others within their organizations to adhere to them.
Standards
IMA members have a responsibility to comply with and uphold the standards of
Competence, Confidentiality, Integrity, and Credibility. Failure to comply may result in
disciplinary action.
a. COMPETENCE
1. Maintain an appropriate level of professional leadership and expertise by
enhancing knowledge and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
3. Provide decision support information and recommendations that are accurate,
clear, concise, and timely. Recognize and help manage risk.
b. CONFIDENTIALITY
1. Keep information confidential except when disclosure is authorized or legally
required.
2. Inform all relevant parties regarding appropriate use of confidential information.
Monitor to ensure compliance.
3. Refrain from using confidential information for unethical or illegal advantage.
c. INTEGRITY
1. Mitigate actual conflicts of interest. Regularly communicate with business
associates to avoid apparent conflicts of interest. Advise all parties of any potential
conflicts of interest.
2. Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
3. Abstain from engaging in or supporting any activity that might discredit the
profession.
4. Contribute to a positive ethical culture and place integrity of the profession above
personal interests.
d. CREDIBILITY
1. Communicate information fairly and objectively.
2. Provide all relevant information that could reasonably be expected to influence an
intended user’s understanding of the reports, analyses, or recommendations.
3. Report any delays or deficiencies in information, timeliness, processing, or internal
controls in conformance with organization policy and/or applicable law.
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4. Communicate professional limitations or other constraints that would preclude
responsible judgment or successful performance of an activity.
In applying the Standards of Ethical Professional Practice, the member may encounter
unethical issues or behavior. In these situations, the member should not ignore them, but
rather should actively seek resolution of the issue. In determining which steps to follow,
the member should consider all risks involved and whether protections exist against
retaliation.
When faced with unethical issues, the member should follow the established policies
of his or her organization, including use of an anonymous reporting system if available.
If the organization does not have established policies, the member should consider the
following courses of action:
The resolution process could include a discussion with the member’s immediate
supervisor. If the supervisor appears to be involved, the issue could be presented
to the next level of management.
IMA offers an anonymous helpline that the member may call to request how key
element of the IMA Statement of Ethical Professional Practice could be applied to
the ethical issue.
The member should consider consulting his or her own attorney to learn of any
legal obligations, rights, and risks concerning the issue.
If resolution efforts are not successful, the member may wish to consider
disassociating from the organization.
Activity 4
1. What are the ethical responsibilities of management accountants?
2. From the perspective of (a) a stockholder, (b) a company manager,
(c) an employee other than a manager, and (d) a customer, explain
why a code of ethics is important for the accountants within a
company.
1. Why do most companies adhere to GAAP for their basic internal financial statements?
A. GAAP is required by law for publicly held companies.
B. To use GAAP and another system of reporting would be too costly for most
companies.
C. Accountants are required by their code of ethics to use GAAP accounting.
D. Accrual accounting provides a uniform way to measure an organization’s financial
performance.
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6. Four themes are common to many managers. The critical theme for all of these is
A. developing relationships with suppliers.
B. benchmarking and continuous improvement.
C. reducing costs and improving efficiencies.
D. improving customer focus and customer satisfaction.
10. The IMA Code of Ethics requires a management accountant to follow the established
policies of the organization when facing an ethical conflict. When management
accountants fail to resolve an ethical conflict by talking with their immediate supervisor
they should
A. communicate the problem to authorities outside the organization.
B. contact the next higher managerial level.
C. notify the audit committee of the board of directors.
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D. contact the chief financial officer.
11. According to the IMA Code of Ethics a practitioner has the responsibility to recognize
professional limitations. Under which standard of ethical conduct would this
responsibility be included?
A. Competency
B. Confidentiality
C. Integrity
D. Objectivity
12. Which of the following groups would be LEAST likely to receive detailed management
accounting reports?
A. Stockholders
B. Sales representatives
C. Production supervisors
D. Managers
References:
Guerero, Pedro P. (2018). Cost Accounting: Principles and Procedural Application. Sampaloc, Manila: GIC Enterprises &
Co., Inc.
De Leon, Norma D. et. al. (2019). Cost Accounting and Control. Quezon City: Rex Bookstore.
Raiborn, Cecily A. & Kinney, Michael R. (2013). Cost Accounting (2 nd ed.). Pasig City: Cengage Learning Asia Pte Ltd
Hansen, Don R. & Mowen, Maryanne M. (2019) Cost Accounting and Control. Quezon City: C & E Publishing Inc.