Accounting for Managers: Interpreting accounting information for decision-making

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34 ACCOUNTING FOR MANAGERS


managers is cost, which forms the basis for most of the following chapters.
The calculation of cost is determined in large part by accounting principles and
the requirements of financial reporting. The cost that is calculated under these
assumptions may have limited decision usefulness.


Cost terms and concepts..................................


Costcan be defined as ‘a resource sacrificed or foregone to achieve a specific
objective’ (Horngrenet al., 1999, p. 31).
Accountants define costs in monetary terms, and while we will focus on
monetary costs, readers should recognize that there are not only non-financial
measures of performance but also human, social and environmental costs. For
example, making employees redundant causes family problems (a human cost)
and transfers to society the obligation to pay social security benefits (a social
cost). Pollution causes long-term environmental costs that are also transferred to
society. These are as important as (and perhaps more important than) financial
costs, but they are not recorded by accounting systems (see Chapter 7 for a further
discussion). The exclusion of human, social and environmental costs is a significant
limitation of accounting.
For planning, decision-making and control purposes, cost is typically defined
in relation to acost object, which is anything for which a measurement of costs
is required. While the cost object is often anoutput–aproductorservice–itmay
also be a resource (aninputto the production process), aprocessof converting
resources into outputs or anarea of responsibility(a department or cost centre)
within the organization. Examples of inputs are materials, labour, rent, marketing
expenses etc. Examples of processes are purchasing, customer order processing,
order fulfilment, despatch etc.
Businesses typically report in relation to line items (the resource inputs) and
responsibility centres (departments or cost centres). This means that decisions
requiring cost information on business processes and product/service outputs are
difficult, because most accounting systems (except activity-based systems, as will
be described in Chapter 11) do not provide adequate information about those cost
objects. For example, in a project-based business, published financial reports do
not provide cost and revenue information about each project, but instead report
information about salaries, rental, office costs etc.
Businesses may adopt a system of management accounting to provide this
information for management purposes, but rarely will this second system reconcile
with the external financial reports because the management information system
may not follow the same accounting principles described earlier in this chapter.
The requirement to produce financial reports based on line items, rather than cost
objects, is a second limitation of accounting as a tool of decision-making.
The notion of cost is also problematic because we need to decide how cost
is to be defined. If, as Horngrenet al.defined it, cost is a resource sacrificed or
forgone, then one of the questions we must ask is whether that definition implies
a cash cost or an opportunity cost. Acash costis the amount of cash expended

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