1.

0 Managerial Accounting
1.1 Objectives, Role, and Scope of Management Accounting

 Objective
the application of appropriate techniques and concepts in processing the historical and projected
economic data of an entity to assist management in establishing a plan for reasonable economic
objectives and in the making of rational decisions with a view towards achieving these objectives (AAA
Committee)

 Role

PLANNING CONTROLLING
 quantitative objectives are established in  setting of standard to measure performance
setting goals
 historical accounting data as the basis in  recording actual performance to compare with
projecting future activities predetermined standards
 quantitative information regarding the  deciding on the required corrective action
different courses of action

 Scope
extend beyond the boundaries of accounting and draw upon finance, economics, operations research,
statistics, mathematics, or other disciplines as necessary

1.1.1 Basic Management Functions and Concept

 Planning
 setting immediate and long-range goals
 predicting future conditions
 considering different means or strategies
 deciding which strategy to be used
 Controlling
 operations are carried out in the best possible way
- done in accordance
- checking the performance
- should there be any deviations

1.1.2 Distinction Among Management Accounting, Cost Accounting, and Financial

Accounting

Managerial Financial
Accountin Accountin
Cost
g g
Accountin
g
(foundatio
n)
- the
process of
determinin
g the cost
of some
particular
product or
activity
 Managerial Accounting Financial Accounting
- internal user - external user
- cost, differential, and responsibility - asset = liability + equity
accounting
- no necessary principles - GAAP
- reporting are optional - mandatory
- information are monetary and nonmonetary - primarily monetary
- projects information about the past, current, - only after transactions
and estimates or plans for the future
- sacrifice precision or accuracy to gain speed - more or less precise or accurate
in reporting
- details are more extensive - compressed and simplified
- sources are drawn not only from the - company’s accounting system
accounting system
- purpose is for planning, directing, and - produce financial statement
controlling
- focuses on segments - as a whole

1.1.3 Roles and Activities of Controller and Treasurer

Controller Treasurer
- planning and control - provision of capital
- reporting and interpreting - investor relations
- evaluating and consulting - short-term financing
- tax administration - banking and custody
- government reporting - credit and collections
- protection of assets - investment
- economic appraisal - insurance

- design and operate a system

- exercises control or line authority over his own department only
- influence over manager

VP -
Financ
Con Trea
e
troll sure
er r
1.1.4 International Certifications in Management Accounting

Certified Management Accountant (CMA)

- expertise in financial accounting and strategic management
- qualified from financial controller to chief financial officer
- issued by Institute Of Management Accountants (IMA)
- requires 300 hours of preparation

 reports and analyses

 provide specific insights useful to corporate decision makers (performance metrics)
 not mandatory but subject to strict code of ethics
 must hold active membership in IMA

 identify opportunities for investment management

 acts as a mentor and supervise lower level accountants
 prepare FS
 make presentation to senior management
 create strategies to improve and manage various internal and external risks
 arrange funding and financing options
 monitor and administer compliance
 1.1.5 Global Trends in Managerial Accounting

TOP 7

1. Expansion from product to channel and customer profitability analysis

- Management accounting must help the sales and marketing functions. A company needs to
know the best types of customer to retain, grow, win back, and acquire – and those who aren’t
2. Management accounting’s expanding role with Enterprise Performance Management (EPM) -
integration of multiple methods
- To achieve the executive team’s strategy, improve control, and increase financial profit
3. The shift to predictive accounting
- Reveals a major transition management accounting for reporting costs and profits to managerial
economics for decision support and analysis that impact the future
4. Business analytics imbedded in EPM methods
- Recognizes that progressive accounting functions now realize the competency and capabilities
with analytics provides a competitive edge
5. Co-existing and improved management accounting methods
- The more progressive CFOs and their management accounting staffs are considering, the
various needs of different types of managers and their organization
6. Managing information technology and shared services as a business
- for management accounting to support internal IT and shared services to be managed as a
business
7. The need for better skills and competency with behavioral cost management
- Requires change agent management accountants to motivate mid-level managers and other
“champions” to demonstrate to their coworkers that progressive management accounting and
EPM methodologies males sense to implement

1.2 Management Accounting Concepts and Techniques for Planning & Control
1.2.1 Cost Terms, Concepts, and Behavior
1.2.1.1 Nature and Classification of Cost

 Nature:
- a resource sacrificed (given up or exchanged) or forgone to achieve a specific objective
- usually measured as the monetary amount that must be paid to acquire goods or services
 Terms:
- when notified by a term that defines the purpose, cost becomes operational
 Concept:
- cost measures the use of resources
 physical quantities of material, hours of labor services, and quantities of other
services
- cost measurement is expressed in monetary terms
 amount of resources
- cost management is always related to a purpose
 cost object – activity or resource
 Behavior:
- how cost responds to a change in activity level within the relevant range
 fixed cost
 variable cost
 mixed cost (semi-variable)
 step cost (semi-fixed)

 Classification

Tot
Dire al Indir
Dire ct
Dir Dire CosIndir ect Indir
Indir
ct Cost
ect ct t ect Cost
ect ect
Mat Prim
La Exp Mat Ove
Lab Exp
erial e
bor ense erial rhea
or ense
Cost d
 a) Functional classification
 Manufacturing cost
 Materials
 Labor
 Factory overhead
 Selling & administrative expense
b) Behavioral classification

Conversion Cost = Direct Labor + Manufacturing Overhead

1.2.1.2 Analysis of Cost Behavior

1. Variable Cost
a) changes in direct portion (x:y ratio) to changes in the cost driver (activity level)
b) must be a constant amount per unit
c) increase activity level: increase total
d) decrease activity level: decrease total

Y
T = No.
Variable
of
ot bx Total
cost
unitsper
al cost cost
unit
co driv
st er
2. Fixed Cost
a) not immediately affected by changes in the cost driver
b) per unit decrease – increase in activity
c) per unit increase – decrease in activity
d) production activity (volume production): HIGH – product share (fixed cost per unit): SMALL
e) production activity (volume production): LOW – product share (fixed cost per unit): HIGH
f) capacity cost: generally incurred to create facility
- cost/ unit: NOT SAME
- production: NOT SAME
- total cost: SAME
co

ot
al
st

T
er
driv
cost
a
=
Y
cost
cost
dTotal
Fixe

*the amount of fixed cost remains constant for all levels of activity
 x

n
u
s
o
c

d
e

f
i

t
i
t

er
iv
dr
st
o
c
3. Mixed/ Semi-variable
 cost of goods sold
 selling and administrative cost

- sometimes semi-fixed cost

- per unit: does not fluctuate in direct proportion with changes in activity or remains constant

er
t driv
cos
e t t
cost cost ed
p Cosline cos
ed ble Fix
o cost al
Mix Varia l Total Tot
s

Y
No.
=a Variabl
of
+ Fix
eunit
cost
bx Tot
ed
per
sal unit
cost
cost
4. Step-cost
a) cost increase in steps/jumps such that over one range of output, the cost remains fixed
b) step variable cost – small steps
c) step fixed cost – large steps
d) semi-fixed cost
 er
driv
t
t
cos
Cos
er tal
driv To
t t
Cos cos
al
Tot

5. Semi-variable Cost
a) Increase at an increasing rate
- Example: as we consume more, we graduate from lower bracket to higher one. We
pay higher charge

b) Increase at an decreasing rate

- Example: learning curve cost – as the employees become familiar with the production
process, the less required hours (at cost) to produce more units

6. Semi-fixed Cost – step function

Total
cost

Activity Level
- Total cost increase
- Activity level increase
 Depreciation Cost
Production level
- Remains constant until another jump occurs at a higher level of activity

 Cost behavior assumption

1) Relevant range assumption
- Band of activity within which the identifies cost behavior patters are valid

Relevant Range

Semi-variable
 Relevant Range

Mixed cost

2) Time assumption
- Cost behavior patterns identified are true only over a specific period of time

1.2.1.3 Splitting Mixed Cost

1. High-Low Method
- seldom used because it can distort cost

highactivity cost−lowest activity cost

variable cost per unit=
highest activity unit – lowets activity unit
*base from number of units
*watch for outliers – do not include (extremely low)

¿ cost=highest activity cost – (variable cost per unit × highest activity unit)

cost model=¿ cost +variable cost × unit activity

2. Scatter Graph Method
- X axis: activity level
- Y axis: corresponding total cost
- does not involve mathematical testing therefore should be applied with care
- relationship between total cost and activity level

y 2− y 1
variable cost per unit=
x 2−x 1
*slope of regression line

¿ cost=Y
Y=a
+ bx No. of
units
Variable
cost
Fixedper unit
cost
Total
cost
 Fixed cost
(Y2)
Total
X1 =
cost Fixed cost 0
(Y1)
X
No. of
2
units
3. Least Squares Regression Method
- linear regression analysis
- most accurate and reliable method (all data points)
- X axis: independent variable
- Y axis: dependent variable
- minimizes the sum of squares of errors

y = a + bx

variable cost per unit=b=n ¿ ¿

¿ cost=a=¿ ¿
1.2.1.4 Cost Prediction Technique

1) Correlation
 statistical association between two variables
- one of them is related to the other
 scatter graph
- non-correlation: do not show any pattern
- non-linear: not a straight line
- linear: somewhat straight line pattern
 linear correlation coefficient

r =n ¿ ¿
“r”
- between (- 1) and (+1)
- unit less measure
- (+r) positive relationship
- (- r) negative relationship
- 0 – no correlation
*the higher the coefficient, the higher % of points the line passes through

R2=(r )2
¿ 51 %=strong
2) Simple Linear Regression
 one variable: predictor/ explanatory
 one variable: response/ dependent
 least square regression

Y=a
+ bx Explanator
ySlope
variable
of
the line
Intercept
Dependent
Variable
*increase in finished goods = deduct in cost of goods manufactured (end > beginning)
*decrease – add
*increase – deduct
 Cost of
Cost of Good Quality Cost of Poor
Quality Quality
Prevention Appraisal External Failure Internal
Cost Cost Cost Failure Cost
(buildthe
Training a (assess quality
Running the (failures found (failures found
of product) Liabilities,
by the customer) Rework
by the project)
QC quality
staff test
product)the Destructive lawsuits, product Scrap
Document
recalls Spoilage
process testing loss
(complaints Errors
Testing Inspecting
Warranty work
equipment deliverables
Lost business and
Time required
lost credibility Money
to do it rightMoney
(system spent spent
development)during the during and
project to after the
avoid project
failures because of
failures

Prevention Cost xx
Appraisal Cost xx
Internal Cost xx
External Cost xx
Quality Cost xx

Opportunity Cost
the potential benefits (income) an individual, investor, or business misses out on when choosing one
alternative over another

Sunk Cost
has already been incurred and cannot be recovered (bygone)

Period Cost
any cost a company incurs that are not directly related to the production process (selling & administrative
expenses)

Product Cost
asset
 unsold finished goods
 work in process

Differential Cost
the difference in cost between two or more business decisions

Cost Cost/Unit Production Total Cost

Variable Same Not Same Not Same
Fixed Not Same Not Same Same
Mixed Not Same Not Same Not Same

*Direct Labor

Regular time × rate – DL

Idle time × rate – MOH
Over time × over time rate – MOH *(half of regular rate)
Fringe benefit cost:

Regular time × FBC rate – DL

Idle time × FBC rate – MOH

*unless stated if cost belongs to DL or MOH

 Increase as volume increase

 Constant
 Decrease as volume decrease
 Increase as volume decrease
 Constant
 Decrease as volume increase
 Increase as volume decrease  Increase as volume increase
 Decrease as volume increase  Decrease as volume decrease

1.2.2 Cost-Volume Profit (CVP) Analysis

1.2.2.1 Uses, Assumptions, and Limitations of CVP

Profit = Sales –
Total Cost= and
= Unit Sold ×
Produce/Sell
Expenses
Selling
+ Price
per Unit
Administer
Sales xx *Units sold × Selling Price per Unit
Cost of goods sold (xx) *Material + Labor + MOH
Gross profit xx
Operating expenses (xx) *Selling + Administrative
Profit (Loss) xx (xx)

 Was the company able to realize its profit objective?

 Is there a possibility of further increasing the amount earned, or is this the maximum amount that the
company can possibly earn?
 Should the company desire to increase this amount further, what course of action should be taken?

 Profit Planning
- A certain amount of profit may be set as the goal for a period, and strategies may be thought of
to attain the goal set
- If sales and cost are to be regarded as factors affecting profit, then maximization of profit can
be accomplished by carefully manipulating these factors

 CVP Analysis
- Relationship among cost, activity levels or volume, and profit
- Uses:
a) Planning
- Projected income, break-even point, revenues and costs even for different
activity level can be determined
b) Control
- Actual results are studied, analyzed and compared with the
projected/planned data
- Significant differences:
 Investigate
 Necessary corrective action should be taken
c) Analysis
- Different alternatives, strategies, possible changes in the profit factors may
be analyzed (possible effects)
- Studying and evaluating past performances
 Basis for a decision
i. Strategies
1. Maintain
2. Improve
3. Scrap
  Basis for commendations/reprimands to persons involved
d) Consider that it has its inherent underlying assumptions, which consequently bring
limitations to its result
- Assumptions & limitations
a) All sorts are classifiable as either fixed or variable
- Segregating their variable and fixed cost components would mean time
consuming and tedious job for analysts and accountants
- Costs are recorded according to their functions and nature
b) Fixed cost remain constant within the relevant range
- Not usually true (time assumption)
c) The behavior of total revenues and total costs will be linear over the relevant range
- Not always true
- Breakeven chart: accountant ≠ economist

Total
Cost

Total
Revenue
Total
Cost
BE
P

BE BE
P P

d) In case of multiple product companies, the selling prices, cost and proportion of units
(sales mix) sold will not change
- Cannot always be correct
 Sales mix: change due to consuming habit
 Selling prices: change due to completion, popularity and
salability of the products
e) There is no significant change in the inventory levels during the period under review
- Not unusual for the company to sell more or less than the number of units
produced

1.2.2.2 Factors Affecting Profit

Acceptable: increase in profit, decrease in BEP

a) Change in selling price per unit (increase: other factors the same)
- Increase in:
 Total sales
 CM per unit and peso
 Profit
 Profit %
- Decrease in:
 BEP unit and peso
- Unchanged:
 VC unit
 Total VC
 Total FC
b) Change in VC unit (increase: other factors the same)
- Increase in:
 Total VC
 BEP unit and peso
- Decrease in:
 CM unit and peso
 Profit
 Profit %
- Unchanged:
 SP unit
 Total sales
  Total FC
c) Change in volume (increase: other factors the same)
- Increase in:
 Total sales
 Total VC
 Total CM
 Profit
- Unchanged:
 SP, VC unit, CM unit, CM%
 Total fixed cost
 BEP unit and peso
d) Change in fixed cost (increase: other factors the same)
- Increase in BEP unit and peso
- Decrease in profit
- Unchanged:
 Total sales
 SP unit
 Total VC and unit
 Total Cm and unit
 VC %
 CM %
e) Change in sales mix
- Example: 3:2:1 to 1:2:3
- Increase in:
 Composite CM
 BEP units

1.2.2.3 BEP in Unit Sales and Peso Sales