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IE-441: Cost Analysis and Control
Instructor:
Ouzhan Vcl, Office: EA310,
E-mail: oguzhan.vicil@bilkent.edu.tr
Office Hours:
Tuesday 10:40 - 12:30, EA310 (By appointment only!)
Course Web Page:

All course related material (e.g. homework
assignments, lecture notes) will be posted on the
course Moodle web page.
Students are responsible for all the
announcements made in class, via e-mail or via
Moodle.
It is the students responsibility to be aware of
what has been covered in lectures, and to check
the web page and e-mail accounts regularly and
not miss any activity/information.
Required Textbook:
C.T. Horngren, S.M. Datar, G. Foster, M. Rajan and
C. Ittner, Cost Accounting A Managerial Emphasis
(Fourteenth Edition), Pearson, Prentice-Hall.
Course Description
This course aims to give students an understanding of:
Fundamentals of managerial cost accounting practices
applied to manufacturing and service organizations;
Cost terms, cost-volume-profit analysis, job costing,
activity based costing as bases of accounting systems;
Master budgets and flexible budgets for planning and
control;
Determination of cost behaviour and pricing
decisions, cost allocation and revenues for profitability
analysis.
Grading:
10 %
15%
25%
25%
25%
Class participation
Quizzes
Midterm I
Midterm II
Final exam
FZ Policy:
FZ limit is 20 points including Midterms and Quizzes.
This means that in order to be eligible for taking the

Final Exam, you should collect in total at least 20
points from the two Midterms and Quizzes!
Attendance: At least 60% attendance is required for
the course. If your attendance level falls below this

level, you may fail the course.
Note that since attendance is part of the course,
attendance will be taken with student signatures.
Any violation of this process (i.e. forging
signatures) is a direct violation of academic
integrity!
Assignments:
HWs will be distributed but they are not going to be
collected, nor graded. But it is highly probable that

your quiz question will be identical or very similar to
the problems in your HWs.
Quizzes:
There will be approximately 4 quizzes. The exact dates
and places will be announced during the semester.

We are going to be using the 4th reserved hour for
quizzes.
There is no make-up of the quizzes!
Make-up Policy:
A make-up examination for the midterms will only be
given under highly unusual circumstances (such as

serious health or family problems).
The student should contact the instructor as early as
possible and provide the instructor with proper

documentation (such as a medical note certified by
Bilkent Universitys Health Center).
Classroom Policy:
Every student is expected to respect the instructor's
right to teach and other students' right to learn.

Any behaviour which distracts or disturbs the other
students or the instructor, or disrupts class in any way

is unacceptable and will not be tolerated.
Any student engaging in inappropriate behaviour will
be asked to leave. Such behaviour might also reflect

negatively on the course grade of the student.
Classroom Policy:
Video recording, taking photos or sound
recording are absolutely forbidden!
Water and coffee is OK. But eating or
chewing gums, etc. are not permitted.
The Manager and Management Accounting
2012 Pearson Prentice Hall. All rights reserved.
All businesses are concerned about

revenues and costs
Whether their products are automobiles, fast food, or
the latest designer fashions, managers must

understand how revenues and costs behave or risk
losing control.
Managers use cost accounting information to make
decisions related to strategy formulation, research and
development, budgeting, production planning, and
pricing, among others.
Can selling less of something

be more profitable than
selling more of it?
iTunesHome to everything that

entertains you
iTunes Variable Pricing:

In 2009, Apple changed the pricing structure for songs
sold through iTunes from a flat fee of $0.99 to a threetier price point system of $0.69, $0.99, and $1.29.
The top 200 songs in any given week make up more
than one-sixth of digital music sales. Apple now

charges the higher price of $1.29 for these hit songs
iTunes Variable Pricing: Downloads

Are Down, but Profits Are Up:
After the first six months of the new pricing model in
the iTunes store, downloads of the top 200 tracks were

down by about 6%.
BUT
While the number of downloads dropped, the higher
prices generated more revenue than before the new
pricing structure was in place.
(Note: Apples iTunes costs do not vary based on the
price of each download)
The study of modern cost accounting yields insights
into how managers and accountants can contribute to

successfully running their businesses. It also prepares
them for leadership roles.
Many large companies, such as Constellation Energy,
Jones Soda, Nike, and the Pittsburgh Steelers, have

senior executives with accounting backgrounds.
Accounting Discipline Overview

Accounting systems provide the information found in
the income statement, the balance sheet, the statement

of cash flow, and in performance reports, such as the
cost of serving customers or running an advertising
campaign.
Managers use accounting information to
administer the activities, businesses, or functional areas
they oversee,
and to coordinate those activities, businesses, or
functions within the framework of the organization.
Understanding this information is

essential for managers to do their jobs.
Individual managers often require the

information in an accounting system to
be presented or reported differently.
Example: Sales Order Information

A sales manager may be interested in the total dollar
amount of sales to determine the commissions to be
paid.
A distribution manager may be interested in the
sales order quantities by geographic region and by
customer-requested delivery dates to ensure timely
deliveries.
A manufacturing manager may be interested in the
quantities of various products and their desired
delivery dates, so that he or she can develop an
effective production schedule.

Financial Accounting:
Focus on reporting to external users including
investors, creditors, and governmental agencies.

It measures and records business transactions and
provides financial statements that must be based on

generally accepted accounting principles (GAAP).

Managerial accounting: :
Measures, analyzes, and reports financial and
nonfinancial information to help managers make

decisions to fulfill organizational goals.
Managerial accounting need not be GAAP compliant.
Managers use management accounting information to
develop, communicate, and implement strategy.

Management accounting information is also used to
coordinate product design, production, and marketing

decisions and to evaluate performance.
Major Differences Between

Financial and Managerial Accounting
Managerial Accounting
Financial Accounting
Decision making
Communicate financial
position to outsiders
Internal managers
External users
Future-oriented
Past-oriented
Do not have to follow GAAP;

cost vs. benefit
GAAP compliant;
CPA audited
Time Span
Ultra current to very long

time horizons
Historical monthly,
quarterly reports
Behavioral
Issues
Designed to influence
employee behavior
Indirect effects on
employee behavior
Purpose
Primary Users
Focus/Emphasis
Rules
Major Differences Between

Financial and Managerial Accounting
Note, however, that reports such as balance sheets,
income statements, and statements of cash flows are

common to both management accounting and
financial accounting
What About Cost Accounting?

Cost accounting provides information for management
accounting and financial accounting.

Cost accounting measures, analyzes, and reports
financial and nonfinancial information relating to

the costs of acquiring or using resources in an
organization.
What About Cost Accounting?

Modern cost accounting takes the perspective that
collecting cost information is a function of the

management decisions being made.
Thus, the distinction between management
accounting and cost accounting is not so clearcut, and we often use these terms
interchangeably.
Strategy and Management Accounting

Strategyspecifies how an organization matches its
own capabilities with the opportunities in the

marketplace to accomplish its objectives
Strategic cost managementfocuses specifically on
the cost dimension within a firms overall strategy

Management accountants work closely with
managers in formulating strategy by providing

information about the sources of competitive
advantage, for example,
the cost, productivity, or efficiency advantage of their
company relative to competitors,

or the premium prices a company can charge relative to
the costs of adding features that make its products or
services distinctive.

Management accounting helps answer important
questions such as:

Who are our most important customers, and how do we
deliver value to them?

What substitute products exist in the marketplace, and
how do they differ from our own?
What is our critical capability? Is it technology,
production, or marketing? How can we leverage it for
new strategic initiatives?
Will we have enough cash to support our strategy or will
we need to seek additional sources?
Management Accounting and Value

Value chain is the sequence of business functions
in which customer usefulness is added to products
or services.
The Value chain consists of:
Research & development
2. Design
3. Production
4. Marketing
5. Distribution
6. Customer service
1.
The Value Chain Illustrated

Each of these business functions is essential to
companies satisfying their customers and keeping
them satisfied (and loyal) over time.

At different times and in different industries, one
or more of these functions is more critical than
others. For example,
a company developing an innovative new product or
operating in the pharmaceutical industry, where

innovation is the key to profitability, will emphasize
R&D and design of products and processes.
A company in the consumer goods industry will focus on
marketing, distribution, and customer service to build
its brand.

Managers track the costs incurred in each valuechain category. Their goal is to reduce costs and to
improve efficiency.
Management accounting information helps
managers make cost-benefit tradeoffs. For
example,
Is it cheaper to buy products from outside vendors or to
do manufacturing in-house?
How does investing resources in design and
manufacturing reduce costs of marketing and customer
service?
Supply-Chain Analysis
Supply Chain: The parts of the value chain
associated with producing and delivering a

product or service.
Supply chain describes the flow of goods, services,
and information,
from the initial sources of materials and services to the
delivery of products
to consumers, regardless of whether those activities
occur in the same organization or in other
organizations.
A Value Chain Implementation
Cost management emphasizes integrating and

coordinating activities across all companies
in the supply chain, to improve performance
and reduce costs.
Key Success Factors

The dimensions of performance that customers
expect, and that are key to the success of a company

include:
Cost and efficiency
Quality
Time
Innovation
Key Success Factors


include:
Cost and efficiency
Quality
Time
Innovation
Management accounting information

helps managers calculate a target
cost for a product by :
Target price
minus
the operating income per unit of
product that the company
desires to earn
Key Success Factors


include:
Cost and efficiency
Quality
Time
Innovation
To achieve the target cost, managers

eliminate some activities (such as
rework) and reduce the costs of
performing activities in all valuechain functionsfrom initial R&D to
customer service
Key Success Factors


include:
Cost and efficiency
Quality
Time
Innovation
Total quality management

(TQM) aims to improve operations
throughout the value chain and to
deliver products and services that
exceed customer expectations.
Key Success Factors


include:
Cost and efficiency
Quality
Time
Innovation
Managers use management

accounting information to evaluate
the costs and revenue
benefits of TQM initiatives
Key Success Factors


include:
Cost and efficiency
Quality
Time
Innovation
New-product development time is the

time it takes for new products to be
created and brought to market.
The increasing pace of technological
innovation has led to shorter product
life cycles and more rapid
introduction of new products.
Key Success Factors


include:
Cost and efficiency
Quality
Time
Innovation
To make product and design

decisions, managers need to
understand the costs and benefits of a
product over its life cycle.
Key Success Factors


include:
Cost and efficiency
Quality
Time
Innovation
To increase customer satisfaction,

organizations need to reduce delivery
time and reliably meet promised
delivery dates.
The primary cause of delays is
bottlenecks
Key Success Factors


include:
Cost and efficiency
Quality
Time
Innovation
Management accounting information

helps managers quantify the costs and
benefits of relieving bottleneck
constraints.
Key Success Factors


include:
Cost and efficiency
Quality
Time
Innovation
A constant flow of innovative

products or services is the basis for
ongoing company success.
Managers rely on management
accounting information to evaluate
alternative investment and R&D
decisions. ons.
Key Success Factors

Management accountants help managers track
performance of competitors on the key success factors.

Competitive information serves as a benchmark and
alerts managers to market changes.

Companies are always seeking to continuously
improve their operations.
Planning and Control Systems

Planning selects goals, predicts results, decides how to
attain goals, and communicates this to the

organization.
Budgetthe most important planning tool
Control takes actions that implement the planning
decision, decides how to evaluate performance, and

provides feedback to the organization.
A Five-Step Decision Making Process in

Planning and Control
1.
2.
3.
4.
5.
Identify the problem and uncertainties.

Obtain information.
Make predictions about the future.
Make decisions by choosing between alternatives.
Implement the decision, evaluate performance, and
learn.
Key Management Accounting Guidelines

1. CostBenefit Approach:
Managers continually face resource-allocation
decisions, such as whether to purchase a new software

package or hire a new employee.
They use a cost-benefit approach when making
these decisions: Resources should be spent if the
expected benefits to the company exceed the expected
costs.
Managers rely on management accounting
information to quantify expected benefits and
expected costs.

2. Behavioral and Technical Considerations
The technical considerations help managers make
wise economic decisions by providing them with the

desired information (for example, costs in various
value-chain categories) in an appropriate format (such
as actual results versus budgeted amounts) and at the
preferred frequency.
The behavioral considerations encourage managers
and other employees to strive for achieving the goals of
the organization.

3. Different Costs for Different Purposes
Managers use alternative ways to compute costs in

different decision-making situations.
A cost concept used for the external-reporting

purpose of accounting may not be an appropriate
concept for internal, routine reporting to managers.

3. Different Costs for Different Purposes
For example consider the advertising costs associated
with Microsoft Corporations launch of a major product
with a useful life of several years,
For external reporting to shareholders, advertising
costs are fully expensed in the income statement in
the year they are incurred.
For internal purposes of evaluating management
performance, however, the advertising costs could be
capitalized and then amortized or written off as
expenses over several years.
A Typical Organizational Structure and

the Management Accountant
The controller (also called the chief

accounting officer) is the financial
executive primarily responsible for
management accounting and financial
accounting.
This text book focuses on the controller as
the chief management accounting executive.
Professional Ethics
At no time has the focus on ethical conduct been
sharper than it is today. Corporate scandals at Enron,

WorldCom, and Arthur Andersen have seriously
eroded the publics confidence in corporations.
The four standards of ethical conduct for management
accountants as advanced by the Institute of

Management Accountants:
Competence
Confidentiality
Integrity
Credibility

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IE-441: Cost Analysis and Control

Course Web Page:

This means that in order to be eligible for taking the

the course. If your attendance level falls below this

collected, nor graded. But it is highly probable that

and places will be announced during the semester.

given under highly unusual circumstances (such as

possible and provide the instructor with proper

right to teach and other students' right to learn.

students or the instructor, or disrupts class in any way

be asked to leave. Such behaviour might also reflect

The Manager and Management Accounting

2012 Pearson Prentice Hall. All rights reserved.

All businesses are concerned about

the latest designer fashions, managers must

2012 Pearson Prentice Hall. All rights reserved.

Can selling less of something

2012 Pearson Prentice Hall. All rights reserved.

iTunesHome to everything that

iTunes Variable Pricing:

than one-sixth of digital music sales. Apple now

2012 Pearson Prentice Hall. All rights reserved.

iTunes Variable Pricing: Downloads

the iTunes store, downloads of the top 200 tracks were

The study of modern cost accounting yields insights

into how managers and accountants can contribute to

Jones Soda, Nike, and the Pittsburgh Steelers, have

2012 Pearson Prentice Hall. All rights reserved.

Accounting Discipline Overview

the income statement, the balance sheet, the statement

Understanding this information is

2012 Pearson Prentice Hall. All rights reserved.

Individual managers often require the

2012 Pearson Prentice Hall. All rights reserved.

Example: Sales Order Information

Accounting Discipline Overview

investors, creditors, and governmental agencies.

provides financial statements that must be based on

2012 Pearson Prentice Hall. All rights reserved.

Accounting Discipline Overview

nonfinancial information to help managers make

develop, communicate, and implement strategy.

coordinate product design, production, and marketing

Major Differences Between

Do not have to follow GAAP;

Ultra current to very long

2012 Pearson Prentice Hall. All rights reserved.

Major Differences Between

income statements, and statements of cash flows are

2012 Pearson Prentice Hall. All rights reserved.

What About Cost Accounting?

accounting and financial accounting.

financial and nonfinancial information relating to

2012 Pearson Prentice Hall. All rights reserved.

What About Cost Accounting?

collecting cost information is a function of the

2012 Pearson Prentice Hall. All rights reserved.

Strategy and Management Accounting

own capabilities with the opportunities in the

the cost dimension within a firms overall strategy

2012 Pearson Prentice Hall. All rights reserved.

Strategy and Management Accounting

managers in formulating strategy by providing

company relative to competitors,