Subject 1: Fundamentals of cost accounting

1- All managers carry out 3 major activities:

A- Planning: Selecting a course of action and specifying how the action will
be implemented
- Identify alternatives;
- Selecting alternatives that does the best job of furthering organization’s
objectives;
- Develop budgets to guide progress toward the selected alternative;
B- Directing and motivating: It involves managing day-to-day activities to
keep the organization running smoothy:
- Employee work assignments;
- Routine problem solving;
- Conflict resolution;
- Effective communication;
C- Controlling: The control function ensures that plans are being followed,
and take feedbacks in the form of performance reports that compare actual
results with the budget;
2- Comparison of Financial and Managerial Accounting:
A- Financial accounting:
- Users: External persons who make financial decisions;
- Time focus: historical perspective;
- Precision/Timeliness: Emphasis on precision;
- Subject: primary is on the whole organization;
- Requirement: Mandatory for external reports;
B- Managerial Accounting:
- Users: Managers who plan for and control an organization;
- Time focus: future emphasis;
- Precision/Timeliness: Emphasis on timeliness;
- Subject: focuses on segments of an organization
- Requirement: Not mandatory;
3- Manufacturing costs:
Cost: the value of economic resources used to achieve a specific purpose
A- Direct materials: raw materials that become an integral part of the finished
product and that can be physically and conveniently traced to it;
B- Direct labor/labor cost: labor cost that can be easily traced to individual
units of product;
 C- Manufacturing overhead: costs that cannot be traced directly to specific
units produced; (wages paid to employee = indirect labor, materials used
to support the production process = indirect materials)
Additional costs:
- Selling or marketing costs: costs necessary to get the order and deliver the
product
- administrative costs: all executive organizational and clerical costs;
Product Vs Period costs
- Product costs: direct materials, direct labor, manufacturing labor
- Period costs: marketing and administrative costs;
Comparing Merchandising and Manufacturing activities;
- Merchandising companies: purchase finished goods from suppliers for resale
to customers;
- Manufacturing companies: purchase raw material from supplier and produce
and sell finished goods to customers;
Similarities and differences in the Balance sheets:
Manufacturing and merchandising companies will likely both have cash,
receivables and prepaid expanses
- Merchandising: report only merchandise inventory;
- Manufacturer: report 3 types of inventories: raw materials, work in process
and finished goods;
4- Predicting cots behavior:
- Variable costs: cost that rise based on how we use them;
- Variable cost per unit: its constant, per example the telephone bill: 10 cents
per minute;
- Fixed costs: costs that remains constant, regardless of changes in the level of
activity;
- Fixed costs per unit: the average fixed cost per unit varies inveriously with
changing in the level of activity;
5- Assigning cost to cost objects:
- Direct costs: costs that can be easily and conveniently traced to a unit of
product or other cost object
- Indirect costs: Costs that cannot be easily and conveniently traced to a unit of
product or another object;
6- Relevant and irrelevant costs
Every decision involves a choice between at least two alternatives;
Only those costs and benefit s that differ between alternatives are levant in a
decision. All other costs and benefits can and should be ignored;
 - Relevant costs and revenues: are future costs and revenues that will be
changed by a decision;
- Irrelevant costs and revenues: are those will not be affected by the decision;

7- Differential costs and revenues: costs and revenues that differ among
alternatives
Example: I have a job paying 1500 in my hometown, and a job paying 2000 in another
city where the commuting cost is 300;
- Differential revenue: 2000-1500 = 500
- Differential cost: 300;
-
A. Opportunity cost: is the potential benefit that is given up when one
alternative is selected over another;
B. Sunk costs: have already been incurred and cannot be changed now or in
the future. They should be ignored when making the decisions;
C. Quality of conformance: when the overwhelming majority of products
produced conform to design specifications and are free from defects; 
Quality means that a product has many features not found in other
products, well designed or defect free;
D. Quality costs:

 Prevention costs: incurred to support activities whose purpose is to

reduce the number of defects;
 Appraisal costs: incurred to identify defective products before the
products are shipped to customers;
 Internal failure costs: incurred as a result of identifying defects before
they are shipped;
 External failure costs: incurred as a result of defective products being
delivered to customers;

Summary subject 1
1. Three Key Managerial Activities:
 Planning: Setting goals, selecting actions, and creating budgets to guide
organizational progress.
 Directing and Motivating: Managing daily operations, assigning tasks,
solving problems, and communicating effectively.
 Controlling: Ensuring plans are followed by comparing actual results to
budgets.
 2. Financial vs. Managerial Accounting:
 Financial Accounting: External focus, historical data, precise, mandatory
for reports.
 Managerial Accounting: Internal focus, future-oriented, emphasizes
timeliness, non-mandatory.
3. Types of Manufacturing Costs:
 Direct Materials: Raw materials directly traceable to products.
 Direct Labor: Easily traceable labor costs.
 Manufacturing Overhead: Indirect costs like maintenance and utilities.
Additional costs include selling/marketing and administrative costs.
4. Product vs. Period Costs:
 Product Costs: Direct materials, direct labor, and manufacturing overhead
(recorded as inventory until sold).
 Period Costs: Marketing and administrative expenses (expensed in the
period incurred).
5. Merchandising vs. Manufacturing Companies:
 Merchandisers purchase and resell finished goods; manufacturers produce
goods.
 Inventory Differences: Merchandisers report merchandise inventory,
while manufacturers report raw materials, work-in-process, and finished
goods.
6. Cost Behavior:
 Variable Costs: Change with usage (e.g., phone bill per minute).
 Fixed Costs: Stay constant regardless of activity level but vary per unit as
activity changes.
7. Direct vs. Indirect Costs:
 Direct Costs: Easily traceable to a product.
 Indirect Costs: Not directly traceable to a specific product.
8. Relevant vs. Irrelevant Costs:
 Relevant costs differ between alternatives and should impact decisions.
 Irrelevant costs remain unchanged by decisions and can be ignored.
9. Differential Costs and Revenues: These vary across alternatives, impacting
decision-making.
10. Opportunity and Sunk Costs:
 Opportunity Cost: The benefit lost when one alternative is chosen over
another.
 Sunk Costs: Past expenses that cannot be changed and should be ignored
in decisions.
11. Quality Costs:
 Prevention Costs: To prevent defects.
 Appraisal Costs: To detect defects before shipping.
 Internal Failure Costs: For defects identified before shipping.
 External Failure Costs: For defects found after delivery.
Subject 2: The decision-making process

Planning process
A- Identify objectives
Economic theory: firm seek to maximize profits for the owners of the firm;
Businessmen are content to find a plan that provides satisfactory profits rather than to
maximize profits; they tend to look for solutions only until the first acceptable solution
is found;
B- Search for alternative courses of action
A company mustn’t concentrate entirely on its present product range and markets
because the market shares and cash flow are allowed to decline, so the management
must identify potential opportunities in order to avoid the danger;
Example for alternatives:
- Developing new products for sales in existing markets;
- Developing new products for new markets;
C- Gather data alternatives
In order to decide which course of action to take, the management must gather data;
D- Select alternative courses of action
The company must select the best alternative between the competing ones;
E- Implement the decisions
Once the alternative courses are selected, they should be implemented as part of the
budgeting process;
Control process
F- Compare actual and planned outcomes and respond to divergences from
plan
The function of control consists of measurement, reporting and subsequent correction
of performance;
To monitor performance, the accountant produces performance reports (comparison of
actual and planned outcomes) and presents them to the appropriate managers who are
responsible for implementing the various decisions;
Performance management – Basics
Achievement of targets
All companies should achieve targets in order to survive, to be competitive and be
profitable;  It tries to be the best to satisfy its owners;
In order to know whether the targets are achieved we implement performance
measurement that will be checked by other partners (Owners, banks, suppliers…)
Performance
- Accomplishment of a task (reach a target);
- Means (resources) used to achieve this target;
- Taking into account the constraints / limits;
Companies need to implement process and tools in order to get a performance
management
Tools of performance management: Balanced score card, benchmarking, activity-
based management;
The mission of financial controller is to implement the adequate performance appraisal
system;
The top management analyze and define the company’s general policy and strategy,
based on the which targets are defined, and finally budget and action plans could be
used to evaluate the performance;
The achievement of financial targets is not sufficient to meet the overall target;
sometimes the targets of each department are divergent and contradictory;
Financial and non-financial indicators should be taken into account to assess the
performance;
Hierarchy of objectives and performance hierarchy
- Mission is the reason for the existence of the organization;
- Corporate objectives: objectives for the primary stakeholder groups 
increase the market value;
- Subsidiary objectives: objectives for the other stakeholder groups  reduce
the amount of pollution;
- Unit objectives: objectives for the operating departments and units of the
organization
The objectives should not be divergent, Goal congruence: the alignment of
corporate objectives with the personal objectives of a manager
Financial Performance Indicators FPIS
At the start, performance measurement was based solely on financial measures,
assuming that the primary objective of all organizations was to maximize the wealth of
the shareholders;
ROI = Profit before interest and tax / capital employed
 ROI will be compared with a target (usually company’s loss of capital)
Residual income = profit before interest and tax – target return x capital
employed
 Ri is not comparable between divisions;

The financial performance indicators lead to excessive focus on cost reduction,

short term cost reduction may be achieved at the expensive long-term performance.
FPIS can measure success, but they don’t ensure success;
FPIS can be set at the strategic level, non-performance measures can be set at all
levels.
Advantages:
- Easier to calculate than financial reports;
- Flexibility: the organizations can come up with any measures that are
appropriate to their objectives;
- Less easily manipulated than financial measures;

Managerial accounting and the business environment

Customer value propositions
- Customer intimacy strategy: understand and respond to individual customer
needs  you should choose us because we understand your needs better than
our competitors (Shoes factories);
- Operational excellence strategy: deliver products and services faster, more
conveniently, and at lower prices than the competitors (airlines companies);
- Product leadership strategy: offer higher quality products (BMW, Apple…);
One company may offer its customers a combination of these three customer value
propositions;
Organizational structure
Decentralization is the delegation of decision-making authority throughout an
organization;
- Entrepreneurial;
- Functional (Marketing, finance…);
 - Divisional (BU 1, BU 2…);
- Matrix (Project 1, Project 2…);
Process management
A business process is a series of steps that are followed in order to carry out some task
in a business.
Business functions making up the value chain of company:
- R&D;
- Product design;
- Manufacturing;
- Marketing
- Distribution;
- Customer service;
Traditional ‘’Push’’ Manufacturing company
Push approach: Manufacturing system in which production is based on a production
plan;
- Raw materials: materials waiting to be processed;
- Work in process: partially completed products;
- Finished goods: completed products awaiting sale;
1- Lean production (just in time production)
a- Identify the value in specific products/services;
b- Identify the business process that delivers value;
c- Organize work arrangements around the flow of the business process;
d- Create a pull system that responds to customer orders;
e- Continuously pursue perfection in the business process;
The goal is to reduce inventories, decrease defects, reduces wasted effort and
shortens customer response time;
The theory of constraints: a constraint is anything that prevents you from getting more
of what you want; this theory is based on the observation that effectively managing the
constraint is the key to success (We determine the step that has the smallest capacity in
the production process);
Only actions that strengthen the weakest link in the ‘’chain’’ improve the process:
- Identify the weakest link;
- Allow the weakest link to set the tempo;
- Focus on improving the weakest link;
- Recognize that the weakest link is no longer so
2- Six sigma (Zero defects)
It’s a process improvement method relying on customer feedback and fact-based data
gathering and analysis techniques to drive process improvement;
DMAIC: Define;  Measure;  Process;  Identify;  Improve;  Control;
3- Corporate governance
The system by which a company is directed and controlled;
The board of directors’ incentive and monitoring the top management to pursue
objectives of stockholders;
Enterprise risk management is a process used by a company to proactively identify
and manage risk;  once a company identifies its risks, perhaps the most common
risk management tactic is to reduce risks by implementing the specific controls;
Corporate social responsibility CSR: is a concept whereby organizations consider
the needs of all stakeholders when making decisions  customers, employees,
suppliers, communities…

The architecture of a performance management system

Responsibility centers
A responsibility center is a unit of a firm where an individual manager is held
responsible for the unit’s performance;
1- Cost or expense center
Cost centers are responsibility centers whose managers are accountable for only those
costs that are under their control  the manager has the one responsibility of keeping
the costs in the range of the budget limits;
2- Revenue centers
Revenue center is a responsibility center that is devoted to raising revenue without any
link to the associated costs;  Aims to maximize the revenue without exceeding the
range of expanses;
3- Profit centers
Responsibility centers whose managers are accountable for both revenues and costs;
4- Investment centers
Responsibility centers whose managers are accountable for costs, revenues and
investment;
The centers are mentioned in the order of the autonomy from the lowest to the
highest one.
The controllability: is the degree of influence that a specific manager has over costs,
revenues or other items in question
Planning Process:
1. Identify Objectives:
o Economic theory suggests firms seek to maximize profit, but often,
satisfactory profit is acceptable.
2. Search for Alternatives:
o Essential to explore beyond current markets/products to avoid decline
and find new opportunities.
o Examples: Develop new products for existing or new markets.
3. Gather Data on Alternatives:
o Essential data collection to inform decisions on the best course of action.
4. Select Alternatives:
o Choose the best among competing options.
5. Implement Decisions:
o Budgeting becomes part of the process once a choice is made.
Control Process:
1. Compare Actual and Planned Outcomes:
o Control involves monitoring and correcting performance.
o Performance reports help managers track results vs. plans and make
necessary adjustments.
Performance Management:
 Targets: Necessary for competitiveness, survival, and profitability.
 Tools: Balanced scorecard, benchmarking, and activity-based management.
 Objectives Hierarchy: Mission (why the company exists), corporate
objectives, subsidiary objectives, unit objectives. Goal congruence aligns
corporate and manager objectives.
Financial Performance Indicators (FPIs):
1. ROI: Measures profit vs. capital employed; compares actual with target.
2. Residual Income (RI): Profit minus a target return; less useful for division
comparisons.
Customer Value Propositions:
  Customer Intimacy: Understanding customer needs deeply (e.g., custom
products).
 Operational Excellence: Fast, efficient, and low-cost services/products.
 Product Leadership: High-quality products.
Organizational Structure:
 Decentralization: Decision-making authority across different levels.
 Types include entrepreneurial, functional, divisional, and matrix structures.
Process Management and Production:
1. Push vs. Pull:
o Push: Traditional production based on forecast.
o Pull (Lean Production): Just-in-time, reduces waste, focuses on
demand.
2. Lean Production:
o Focuses on reducing inventory, defects, and wasted effort while
improving customer response time.
3. Theory of Constraints:
o Strengthen the weakest link in the production chain to improve overall
performance.
4. Six Sigma (Zero Defects):
o DMAIC (Define, Measure, Analyze, Improve, Control) to improve
processes based on customer feedback.
Corporate Governance:
 Ensures alignment of company management with stockholder objectives, with
risk management (ERM) and CSR (Corporate Social Responsibility) to
consider all stakeholders.
Responsibility Centers:
1. Cost Center: Managers control costs within a budget.
2. Revenue Center: Focus solely on maximizing revenue.
3. Profit Center: Responsible for both costs and revenues.
4. Investment Center: Responsible for costs, revenues, and investments.
Subject 3: Breakeven point & business decisions
Mixed costs: has both fixed and variable components;
The cost line can be expressed as an equation: Y=a + bX
Breakeven analysis
The breakeven: the level of sales at which profit is zero.
1- Contribution margin: is the amount remaining from sales revenue after
variable expenses have been deducted; it is used first to cover fixed expenses;
the remaining CM contributes to net operating income;
 The CM Ratio = Total CM / Total sales
 Interpretation: each 1dh increase in sales results in a total contribution
margin increase of (the result);

Breakeven point in units sold = Fixed expenses / unit contribution margin;

Breakeven point in total sales = Fixed expenses / CM ratio;
2- Equation method:
Profits = (Sales – Variable expenses) – Fixed expenses
Sales = Variable expenses + Fixed expenses + Profits
 At the breakeven point, profits = 0;
Example (Breakeven point in units):
500dh Q = 300dh Q + 80000dh + 0
- Q is the number of bikes sold;
- 500 is the unit selling price;
- 300 is the unit variable expense;
- 80.000 is the fixed expenses;
 Q = 400 units;
 If the company sells more than 400 units, it will make profits; if it sells
less than 400 units it will make a loss;

Example (Breakeven point in sales):

X = 0.6X + 80000dh + 0
- X = total sales Dhs;
- 0,6 = variable expenses as a % of sales;
- 80.000 is the fixed expenses;
  X = 200.000 Dhs
 If the company sells more than 400 units, it will make profits; if it sells
less than 400 units it will make a loss;
Target profit
If the company has a target profit of 100.000 Dh, we can set the profit at 100.000
instead of 0 and make our analysis.
In the CM method, Target profit = (Fixed expenses + target profit) / unit contribution
margin;
The margin of safety
The margin of safety: is the excess of budgeted (or actual) sales over the breakeven
volume of sales;
 Margin of safety = total sales – breakeven sales
 Margin of safety (%) = margin of safety / total sales
 Margin safety in units = margin of safety / price per unit
Subject 4: Make & Buy decisions
Cost concepts for decision making
Making decisions is one of the basic functions of a manager, to be successful in that
managers must be able to tell the difference between relevant and irrelevant data;
 A relevant cost is a cost that differs between alternatives
Every decision involves a choice between at least two alternatives, and only costs and
benefits that differ between alternatives are relevant in a decision, all other costs and
benefits (irrelevant ones) can and should be ignored;
 Relevant costs and revenues: are future costs and revenues that will be
changed by a decision;
 Irrelevant costs and revenues: are those who will not be affected by the
decision;
 Avoidable cost: is a cost that can be eliminated by choosing one
alternative over another  avoidable costs are relevant costs;
unavoidable costs are irrelevant costs;
Two categories of costs are never relevant in any decision:
 Sunk cost: a cost that is already been incurred, and cannot be avoided
regardless of what a manager decides to do;
 Future costs that do not differ between the alternatives;
Relevant cost analysis (2 step process)
1- Eliminate costs and benefits that do not differ between alternatives; (Sunk costs
and future costs that do not differ between alternatives)
2- Use the remaining costs and benefits that do differ between alternatives in
making the decision, the costs that remain are the differential/avoidable costs;
Costs can be relevant in one decision situation and irrelevant in another context.

The total approach requires constructing two contribution format income statements,
one for each alternative, the difference between the two income statements equals the
differential benefits;
The differential approach: we can analyze the situation before and after engaging a
cost only by looking at the different costs and revenues (and we will arrive at the same
solution), this approach is better for two reasons:
- We don’t have the time to produce two detailed income statements for both
alternatives;
- Mingling relevant costs with irrelevant costs may be confusing and distract
attention away from the information that is really critical;
A contribution margin approach: compare fixed cost savings to the lost contribution
margin;
Adding/Dropping segments: (a very important decision)
A company should drop a segment only if its profit would increase, this would only
happen if the fixed cost savings exceed the lost contribution margin;
Comparative income approach: compare income statements showing results with and
without the digital watch segment;
The make or buy decision
A make or buy decision is the decision to carry out one of the activities in the value
chain internally rather thank to buy externally from a supplier; (Décider entre
produire en interne ou acheter des fournisseurs)
Key terms and concepts
A special order: is a one-time order that is not considered part of the company’s
normal ongoing business;
 When analyzing a special order only the incremental costs and benefits
are relevant;
Subject 5: internal transfer prices
Decentralization in organizations
The decentralization is the delegation of decision-making authority throughout an
organization by allowing managers at various operating levels to make key decisions
relating to their area of responsibility, top managers too must delegate some decisions;
1- Advantages:
- Top management concentrate on strategy;
- Lower-level managers gain experience in decision-making;
- Lower-level decision is often based on better information;
- Decision-making authority leads to job satisfaction;
- Lower-level managers can respond quickly to customers;
2- Disadvantages of decentralization:
- Lower-level managers may make decision without seeing the big picture
(understanding the strategy);
- May be lack of coordination among autonomous managers;
- Lower-level manager’s objectives may not be those of the organization;
3- Types of responsibility centers
- Cost center; (lowest autonomy)
- Revenue center;
- Profit center;
- Investment center; (highest autonomy)

Segment: is a part activity of an organization about which a manager seeks cost,

revenue or profit data
A transfer price: is the price charged when one segment of a company provides goods
or services to another segment of the company;
 It motivates managers to act in the best interests of the overall company;
Primary approaches to setting transfer prices
1- Negotiated transfer price: results from discussions between the selling and
buying divisions;
 The selling unit wants to see the price as high as possible, and the
buyer unit wants to see it as low as possible;
Advantages:
- They preserve the autonomy of the divisions, which is consistent with the
spirit of decentralization;
- Most appropriate when managers have equal bargaining power;
Limitations:
 - Can lead to sub-optimal decisions;
- Divisional profitability may be strongly influenced by the bargaining skills
and powers of the divisional managers;
From the point of view of the supplying division:
Transfer price >= variable cost + opportunity cost
Opportunity cost is the potential benefit that is given up when one alternative selected
over the other;
From the point of view of the buying division:

2- Transfers at the cost to the selling division (Cost-based prices): set transfer
prices at either the variable cost or full absorption, cost incurred by the selling
division;
Drawbacks (limits):
- The selling division will never show a profit on any internal transfer;
- Cost-based transfer prices do not provide incentives to control costs;
- Doesn’t reflect market conditions;
3- Transfers at market price: use the market price for the transferred good; (often
is the best approach to the transfer pricing problem);
A market price is the price charged for an item on the open market;
This approach:
+ Encourages efficiency;
_ only possible if a perfectly competitive external market exists;
_ Market prices may fluctuate;
Divisional autonomy and suboptimization
The principle of decentralization suggest that companies should grants managers
autonomy to set transfer prices and to decide whether to sell internally or externally,
even if this may occasionally result in suboptimal decisions;
 This way the top management allows subordinates to control their own
destiny;
Suboptimization occurs when different subunits each attempt to reach a solution that is
optimal for that unit, but that may not be optimum for the organization as a whole;
Transfer pricing objectives
1- Domestic
 - Greater divisional autonomy: managers should be free to make their own
decisions;
- Greater motivation for managers;
- Better performance evaluation: transfer prices should be fair and allow an
objective assessment of divisional performance
- Better goal congruence: transfer prices should encourage divisional
managers to make decisions which are in the best interests of the
organization as a whole;
2- International
- Less taxes;
- Duties;
- Tariffs;