Principles of Cost Accounting 15th Edition
An article in the August 22, 2008 Wall Street Journal, ‘‘Burger King Battles Costs with Small Whopper Jr.,’’ describes Burger King’s attempt to ‘‘overcome high ingredient costs that are eating into its profit.’’ Chief Executive John Chidsey said, ‘‘To combat costs, Burger King is testing its $1 Whopper Jr. with smaller hamburger pattie—down to two ounces apiece from 2.2 ounces—in some markets and experimenting with different beverage sizes.’’ The article went on to explain that ‘‘McDonald’s is testing modifications to its $1 double cheeseburger, including selling a different version and raising the price of the traditional double cheeseburger.’’
. What is the total cost to make and sell each Whopper Jr. or McDonald’s double cheeseburger?
. How many burgers must be sold and at what prices to cover costs and to provide shareholders with an acceptable return on their investment?
. Given that fast-food prices are constrained by competitors’ prices, what other cost-cutting measures might Burger King employ to return operations to normal profit margins? These questions can be best answered with the aid of cost information introduced in this and the following chapters.
The importance of cost accounting information to the successful operation of a business has long been recognized. However, in the current global economic environment, such information is more crucial than ever. Automobiles from Korea, clothing from China, electronic equipment from Japan, and laptop computers from Poland are just a few examples of foreign-made products that have provided stiff competition to U.S. manufacturers both at home and abroad. As a result of these pressures, companies today are placing more emphasis on controlling costs in an attempt to keep their products competitive. For example, U.S. companies are outsourcing production and service activities to other countries, such as production operations in Honduras and Indonesia and technical support call centers in India.
Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. Figure 1-1 illustrates the production process for goods and services for which cost accounting provides information. Management uses this information to decide how to allocate resources to the most efficient and profitable areas of the business.
All types of business entities—manufacturing, merchandising, and service businesses—require cost accounting information systems to track their activities. Manufacturers convert purchased raw materials into finished goods by using labor, technology, and facilities. Merchandisers purchase finished goods for resale. They may be retailers, who sell products to individuals for consumption, or wholesalers, who purchase goods from manufacturers and sell to retailers. For-profit service businesses, such as health clubs, accounting firms, and NBA basketball teams, sell services rather than products. Not-for-profit service agencies, such as charities, governmental agencies, and some health care facilities, provide services at little or no cost to the user.
The nature of the manufacturing process requires that the accounting information systems of manufacturers be designed to accumulate detailed cost data relating to the production process. It is common today for manufacturers of all sizes to have cost accounting systems that track the costs incurred to produce and sell their diverse product lines. While the cost accounting principles and procedures discussed in the text mostly emphasize manufacturers, many of the same principles apply to merchandising and service businesses. Cost accounting is essential to the efficient operation of fast-food restaurants, athletic teams, fine arts groups, hospitals, social welfare agencies, and numerous other entities. Chapter 9 and various other sections throughout the text illustrate cost accounting procedures for service businesses.
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