, Chapter 1
Introduction to Cost Accounting
Learning Objectives
After completing this chapter, you should be able to answer the following questions:
1. What are the relationships among financial, management, and cost accounting?
2. What is a mission statement, and why is it important to organizational strategy?
3. What is a value chain, and what are the major value chain functions?
4. How is a balanced scorecard used to implement an organization’s strategy?
5. Why is ethical behavior so important in organizations?
Terminology
Authority: The right (usually by virtue of position or rank) to use resources to accomplish a task or
achieve an objective
Balanced scorecard: A framework that restates an organization’s strategy into clear and objective
performance measures focused on customers, internal business processes, employees, and
shareholders
Competence: Professional ethics standard that requires professionals to develop and maintain the skills
needed to practice their profession
Confidentiality: Professional ethics standard that requires professionals to refrain from disclosing
company information to inappropriate parties (such as competitors)
Core competency: Any critical function or activity in which an organization seeks a higher proficiency
than its competitors, making it the root of competitiveness and competitive advantage
Cost accounting: A discipline that addresses the demands of both financial and management
accounting by providing product cost information to (1) external parties (stockholders, creditors, and
various regulatory bodies) for investment and credit decisions and (2) internal managers who are
responsible for planning, controlling, decision making, and evaluation of performance
Cost leadership: A company’s ability to maintain its competitive advantage by undercutting competitor
prices
,Credibility: Professional ethics standard that requires individuals to provide full, fair, and timely
disclosure of all relevant information in a given situation
Customer value perspective: The balanced scorecard perspective that addresses how well the
organization is doing relative to important customer criteria such as speed (lead time), quality, service,
and price (both purchase and after purchase)
, Downstream cost: Costs such as marketing, distribution, and customer service which are typically
incurred after production of the product as opposed to upstream costs of research and development and
product design
Earnings management: The act of using accounting methods or practices to deliberately “adjust” a
company’s profit amount to meet a predetermined internal or external target
Environmental constraint: any limitation caused by external cultural, fiscal (such as taxation structures),
legal/regulatory, or political situations and by the competitive market structures that cannot be directly
controlled by management
Financial performance perspective: The balanced scorecard perspective that addresses the concerns
of stockholders and other stakeholders about profitability and organizational growth
Integrity: Professional ethics standard that prohibits individuals from participating in activities that would
discredit their company or profession
Intellectual capital: All of the intangible assets contained in an organization, including knowledge, skills,
and information that are used to create ideas for products and services, to train and develop employees,
and to attract and retain customers
Internal business perspective: The balanced scorecard perspective that addresses those things that
the organization needs to do well to meet customer needs and expectations
Lag indicator: Historical financial data or other outcomes resulting from past actions, such as installing a
new production process or implementing a new software system
Lead indicator: Future financial and non-financial outcomes including opportunities and problems that
help an organization assess strategic progress and guide decision making before lag indicators are
known
Learning and growth perspective: The balanced scorecard perspective that focuses on using the
organization’s intellectual capital to adapt to changing customer needs or to influence new customer
needs and expectations through product or service innovations
Line personnel: Employees who work directly toward attaining organizational goals. Line personnel
are often held responsible for achieving targeted balanced scorecard measures or budgeted operating
income for their divisions or geographic regions; examples would include managers in production, sales,
and distribution
Management accounting: That part of accounting that is concerned with providing information to parties
inside an organization so that they can plan, control operations, make decisions, and evaluate
performance
Mission statement: A written expression of organizational purpose that describes how the organization
uniquely meets its targeted customers’ needs with its products or services
Organizational structure: Reflects the way in which authority and responsibility for making decisions is
distributed in an organization
Product Cost: The sum of the costs incurred within the factory to make one unit of product
Product differentiation: A company’s ability to offer superior quality products or more unique services
than competitors; such products and services, generally, are sold at a premium price
Responsibility: The obligation to accomplish a task or achieve an objective
Return on investment (ROI): A measure calculated as net income divided by total assets which was
used historically to allocate resources and evaluate divisional performance
Introduction to Cost Accounting
Learning Objectives
After completing this chapter, you should be able to answer the following questions:
1. What are the relationships among financial, management, and cost accounting?
2. What is a mission statement, and why is it important to organizational strategy?
3. What is a value chain, and what are the major value chain functions?
4. How is a balanced scorecard used to implement an organization’s strategy?
5. Why is ethical behavior so important in organizations?
Terminology
Authority: The right (usually by virtue of position or rank) to use resources to accomplish a task or
achieve an objective
Balanced scorecard: A framework that restates an organization’s strategy into clear and objective
performance measures focused on customers, internal business processes, employees, and
shareholders
Competence: Professional ethics standard that requires professionals to develop and maintain the skills
needed to practice their profession
Confidentiality: Professional ethics standard that requires professionals to refrain from disclosing
company information to inappropriate parties (such as competitors)
Core competency: Any critical function or activity in which an organization seeks a higher proficiency
than its competitors, making it the root of competitiveness and competitive advantage
Cost accounting: A discipline that addresses the demands of both financial and management
accounting by providing product cost information to (1) external parties (stockholders, creditors, and
various regulatory bodies) for investment and credit decisions and (2) internal managers who are
responsible for planning, controlling, decision making, and evaluation of performance
Cost leadership: A company’s ability to maintain its competitive advantage by undercutting competitor
prices
,Credibility: Professional ethics standard that requires individuals to provide full, fair, and timely
disclosure of all relevant information in a given situation
Customer value perspective: The balanced scorecard perspective that addresses how well the
organization is doing relative to important customer criteria such as speed (lead time), quality, service,
and price (both purchase and after purchase)
, Downstream cost: Costs such as marketing, distribution, and customer service which are typically
incurred after production of the product as opposed to upstream costs of research and development and
product design
Earnings management: The act of using accounting methods or practices to deliberately “adjust” a
company’s profit amount to meet a predetermined internal or external target
Environmental constraint: any limitation caused by external cultural, fiscal (such as taxation structures),
legal/regulatory, or political situations and by the competitive market structures that cannot be directly
controlled by management
Financial performance perspective: The balanced scorecard perspective that addresses the concerns
of stockholders and other stakeholders about profitability and organizational growth
Integrity: Professional ethics standard that prohibits individuals from participating in activities that would
discredit their company or profession
Intellectual capital: All of the intangible assets contained in an organization, including knowledge, skills,
and information that are used to create ideas for products and services, to train and develop employees,
and to attract and retain customers
Internal business perspective: The balanced scorecard perspective that addresses those things that
the organization needs to do well to meet customer needs and expectations
Lag indicator: Historical financial data or other outcomes resulting from past actions, such as installing a
new production process or implementing a new software system
Lead indicator: Future financial and non-financial outcomes including opportunities and problems that
help an organization assess strategic progress and guide decision making before lag indicators are
known
Learning and growth perspective: The balanced scorecard perspective that focuses on using the
organization’s intellectual capital to adapt to changing customer needs or to influence new customer
needs and expectations through product or service innovations
Line personnel: Employees who work directly toward attaining organizational goals. Line personnel
are often held responsible for achieving targeted balanced scorecard measures or budgeted operating
income for their divisions or geographic regions; examples would include managers in production, sales,
and distribution
Management accounting: That part of accounting that is concerned with providing information to parties
inside an organization so that they can plan, control operations, make decisions, and evaluate
performance
Mission statement: A written expression of organizational purpose that describes how the organization
uniquely meets its targeted customers’ needs with its products or services
Organizational structure: Reflects the way in which authority and responsibility for making decisions is
distributed in an organization
Product Cost: The sum of the costs incurred within the factory to make one unit of product
Product differentiation: A company’s ability to offer superior quality products or more unique services
than competitors; such products and services, generally, are sold at a premium price
Responsibility: The obligation to accomplish a task or achieve an objective
Return on investment (ROI): A measure calculated as net income divided by total assets which was
used historically to allocate resources and evaluate divisional performance
