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60 CHAPTER 3 Introduction to Accounting

Figure 3-10: Parallel accounting

CONCEPTS IN MANAGEMENT ACCOUNTING
At the beginning of the chapter we explained that fi nancial accounting and
management accounting, or controlling (CO), are very closely related. In fact,
most of the data used in management accounting are derived from fi nancial
accounting. Therefore, we pause here to introduce a few a key concepts in
management accounting.
As the name suggests, a key function of management accounting is to
manage and allocate costs. Companies incur these costs as they carry out vari-
ous business processes. For example, the fulfi llment process involves costs
related to selling products and services, and the production process involves
costs associated with manufacturing products. Other costs include supplies,
maintenance, and equipment that are consumed by various processes.
To properly allocate and track costs, the organization is divided into cost
centers. A cost center is associated with a location where costs are incurred.
Cost centers can be associated with departments, such as marketing and fi nance;
with locations, such as plants; and with individuals. In essence, a cost center is
something that absorbs costs that are generated when companies execute pro-
cesses. For example, when the company purchases supplies, it assigns the costs
of the purchase to a cost center. Thus, if the marketing department purchases
offi ce supplies, the company assigns or charges the cost of the supplies to the
marketing cost center. Periodically, the company reviews and further allocates
these accumulated costs. Think of a cost center as a container or bucket that
accumulates costs.
In Chapter 1 we introduced numerous processes in simple terms. One
of the common themes across most processes is the need to “authorize”
the execution of these processes. This authorization often takes the form of
“orders.” For example, in introducing the procurement process, we noted that
the authorization to acquire materials is typically a purchase order. Likewise,
the authorization to fi ll a customer order is a sales order, and the authorization
to produce something is a production order. Like cost centers, costs incurred
during processes can be allocated to or absorbed by these orders. Collectively,
these orders and cost centers are called cost objects. As we discuss various
processes beginning with Chapter 4, we will illustrate how companies use cost
objects to accumulate costs as they execute these processes.

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