CHAPTER 1: THE ACCOUNTANT’S ROLE IN THE ORGANIZATION  CFO (Chief Financial Officer)

o Controller: Oversees financial and managerial accounting.

ACCOUNTING DISCIPLINES o Treasury
o Risk Management
o Taxation
 Financial Accounting: Focuses on external users and follows GAAP o Internal Audit
rules.
 Managerial Accounting: Focuses on internal users and does not
PROFESSIONAL ETHICS
strictly follow GAAP. It also supports financial accounting.
o Includes Cost Accounting and Cost Management.
Management accountants follow these ethical standards:
DIFFERENCES BETWEEN FINANCIAL AND MANAGERIAL
ACCOUNTING 1. Competence
2. Confidentiality
3. Integrity
Aspect Managerial Accounting Financial Accounting 4. Objectivity
Helps managers make Communicates financial
Purpose
decisions position CHAPTER 2: COST TERMS AND PURPOSES
Users Internal managers External stakeholders
Focus Future-oriented Past-oriented BASIC COST TERMINOLOGY:
Rules Cost-benefit approach GAAP
Time  Cost – Sacrificed resources to achieve an objective.
Varies Annual/Quarterly  Actual Cost – A cost that has occurred.
Span
 Budgeted Cost – A predicted cost.
 Cost Object – Anything for which a cost is measured.
STRATEGY AND MANAGEMENT ACCOUNTING
 Cost Accumulation – Collection of cost data.
 Cost Assignment – Allocating costs to a cost object via tracing (direct
 Strategy: Aligns an organization's capabilities with market costs) or allocation (indirect costs).
opportunities.
 Strategic Cost Management: Focuses on cost efficiency within
DIRECT VS. INDIRECT COSTS:
strategy.
 Key Questions Management Accounting Helps Answer:
o Who are the most important customers?  Direct Costs – Easily traced (e.g., materials, wages).
o What substitute products exist?  Indirect Costs – Cannot be directly traced, so they are allocated (e.g.,
o What critical resources do we have? rent, electricity).
o Do we have enough cash to support our strategy?
FACTORS AFFECTING DIRECT/INDIRECT COST CLASSIFICATION:
MANAGEMENT ACCOUNTING AND VALUE

 Materiality, technology, and operational design affect how costs

 Value: The usefulness customers gain from a product/service. are categorized.
 Value Chain: Steps where customer value is added:
1. Research & Development COST BEHAVIOR:
2. Design
3. Production
4. Marketing  Variable Costs change with production levels (constant per unit).
5. Distribution  Fixed Costs remain unchanged in total but decrease per unit as output
6. Customer Service increases.
 Also includes supply chain analysis.
COST DRIVERS & RELEVANT RANGE:
Key Success Factors
 Cost Driver – A factor that influences costs.
To remain competitive, companies must focus on:  Relevant Range – The activity range within which cost behavior
remains stable.
1. Cost & Efficiency
2. Quality Caution on Unit Costs:
3. Time
4. Innovation
 Unit costs vary with output levels, so decisions should be based on total
costs.
PLANNING AND CONTROL SYSTEMS

TYPES OF FIRMS & INVENTORIES:

 Planning: Setting goals, predicting results, and strategizing.
o The budget is the most important planning tool.
 Control: Implementing plans, evaluating performance, and providing  Manufacturing Firms produce their own goods.
feedback.  Merchandising Firms resell products.
 Service Firms provide services rather than tangible goods.
ROLES OF MANAGEMENT ACCOUNTING  Inventory Types:
o Direct Materials – Raw materials.
1. Problem Solver
o Work-in-Process (WIP) – Partially completed products.
2. Scorekeeper (tracks financial data) o Finished Goods – Ready-for-sale products.
3. Attention Director (highlights key issues)
PRODUCT COSTS VS. PERIOD COSTS:
MANAGEMENT ACCOUNTING GUIDELINES
 Product Costs (Inventoriable Costs): Costs related to production
(materials, labor, overhead).
 Cost-Benefit Approach: Benefits must outweigh costs.
 Behavioral & Technical Considerations: People, not just numbers,
 Period Costs: Expenses incurred immediately (marketing, distribution,
administration).
affect decisions.
 Different Cost Definitions: Costs vary depending on use.
COST FLOWS & FINANCIAL STATEMENTS:
ORGANIZATIONAL STRUCTURE OF MANAGEMENT ACCOUNTING
 Cost of Goods Manufactured (COGM): Tracks costs from materials
to finished products.
 CEO (Chief Executive Officer)
 Income Statement: Reports revenues, cost of goods sold, and
operating expenses.

OTHER COST CONSIDERATIONS:

PROFIT PLANNING
 Prime Cost: Direct materials + direct labor.
 Conversion Cost: Direct labor + manufacturing overhead.  Modified break-even formula to include a target operating income (OI):
 Overtime Costs: Considered part of overhead.

DIFFERENT COST DEFINITIONS FOR DIFFERENT APPLICATIONS:

 Pricing & Product-Mix Decisions: May use comprehensive cost

analysis. CVP AND INCOME TAXES
 Government Contracts: Require specific cost definitions for
compliance.
 External Financial Reports: Must follow GAAP rules.

THREE KEY FUNCTIONS OF COST ACCOUNTING:

1. Calculating product/service costs.

2. Providing data for planning, control, and performance
evaluation.
3. Analyzing relevant costs for decision-making.

CHAPTER 3: CVP ANALYSIS

SENSITIVITY ANALYSIS (WHAT-IF SCENARIOS)
1. Sales volume is the only factor affecting costs and revenue.
2. Costs are categorized as either fixed or variable. CVP helps analyze how profit changes when:
3. Revenues and costs behave in a linear manner (straight-line
graphs).
4. Selling price, variable costs per unit, and fixed costs are known 1. Selling price changes
and constant. 2. Sales volume changes
5. For multiple products, their sales mix remains constant. 3. Cost structure changes
6. Time value of money (interest) is ignored. 4. Variable costs per unit change
5. Fixed costs change

Key Formulas
MARGIN OF SAFETY (MOS)

TOTAL COST AND OPERATING INCOME

 Indicates risk level by showing how much sales can drop
before losses occur.

CONTRIBUTION MARGIN (CM)

 CM = Sales Revenue - Variable Costs

 CM per Unit = Selling Price per Unit - Variable Cost per Unit
 Total CM = CM per Unit × Quantity Sold
OPERATING LEVERAGE (OL)
 CM Ratio = CM per Unit ÷ Selling Price

CONTRIBUTION MARGIN INCOME STATEMENT

 Measures how sensitive operating income is to changes in sales volume.
 Formula:

SALES MIX AND CVP (MULTI-PRODUCT CASE)

BREAK-EVEN ANALYSIS  When multiple products exist, calculate a weighted-average

contribution margin per unit:

 Break-even Quantity (BEQ):

 Multi-product break-even:

 Break-even Sales in Dollars (if unit data is unavailable):

 MULTIPLE COST DRIVERS o Overhead Rate: $10 per labor hour
o Labor Hours Used: 5
Variable costs may depend on different activity levels, such as: o Overhead Applied: $10 × 5 = $50
o Total Job Cost: $100 + $200 + $50 = $250

 Customer count
JOURNAL ENTRIES IN JOB COSTING
 Passenger miles
 Patient days
1. Purchasing Materials (on credit):
 Student credit-hours

COMPARING CONTRIBUTION MARGIN & GROSS PROFIT

2. Using Direct and Indirect Materials in Production:

Contribution Margin Income Financial Accounting Income
Statement (Internal Use) Statement (GAAP-Based)
Revenue: $200 Revenue: $200
- Variable Costs ($120 + $45) = $165 - Cost of Goods Sold = $120
Contribution Margin = $35 Gross Profit = $80
- Fixed & Variable Operating Costs = 3. Recording Direct and Indirect Labor:
- Fixed Operating Costs = $20
$65
Operating Income = $15 Operating Income = $15

4. Recording Indirect Costs (Overhead):

Key Difference:

 Contribution Margin separates fixed and variable costs, while Gross

Profit only accounts for COGS.

CHAPTER 4: JOB COSTING

5. Applying Overhead to WIP (Using Predetermined Rate):

BASIC COSTING TERMINOLOGY

 Cost Object – Anything costs are assigned to (e.g., products,

departments, customers).
 Direct Costs – Costs that can be directly traced (e.g., materials,
labor). 6. Transferring Completed Jobs to Finished Goods:
 Indirect Costs – Overhead costs that must be allocated (e.g.,
utilities, rent).
 Cost Pool – A grouping of related costs for allocation.
 Cost-Allocation Base – A cost driver used to distribute indirect costs 7. Selling Products on Credit:
(e.g., direct labor hours).

TYPES OF COSTING SYSTEMS

1. Job-Costing – Used for unique jobs that consume different resources

(e.g., custom furniture, aircraft).
2. Process-Costing – Used for mass production of similar items (e.g.,
soda, oil refining).
ACCOUNTING FOR OVERHEAD

COSTING APPROACHES
1. Two Overhead Accounts Exist:
o Manufacturing Overhead Control (actual overhead costs
1. Actual Costing – Uses actual indirect cost rates and actual activity incurred).
levels. o Manufacturing Overhead Allocated (budgeted overhead
2. Normal Costing – Uses budgeted indirect cost rates and actual applied).
activity levels. 2. Over/Underapplied Overhead:
3. Both methods allocate direct costs using actual cost rates and actual o Underallocated Overhead (if actual costs > allocated).
consumption.
o Overallocated Overhead (if actual costs < allocated).
3. Adjusting Overhead Balances:
SEVEN STEPS OF JOB COSTING o Adjusted Allocation Rate Approach – Recalculates costs
using actual rates.
1. Identify the job. o Proration Approach – Distributes the difference among COGS,
2. Identify direct costs. WIP, and Finished Goods.
3. Select a cost-allocation base for indirect costs. o Write-Off Approach – Charges the entire difference to COGS.
4. Match indirect costs to their cost-allocation base.
5. Compute Overhead Allocation Rate:

6. Allocate overhead costs:

7. Compute total job cost:

EXAMPLE OF JOB COSTING

 Job #123:
o Direct Materials: $100
o Direct Labor: $200