Ch01 Ch02 PT Bea Spdfs

After studying this chapter, you will be able to: CHAPTER
ONE:
o Identify the major differences and similarities between financial and managerial accounting.
INTRODUCTION management accounting both under local and Explain the key principles and relevance of
global setting.
Describe how management accounting creates
value to the firm.
TO MANAGEMENT of Management Accountants in cross-functional o Identify, recognize, and analyze the different roles
teams and in the organization as a whole.
o Determine the career options that calls for a wide range of skills of management accountants including
graduates of BSMA.
ACCOUNTING Understand the importance Of upholding ethical
standards and apply such standards.
o Compare the functions Of the controller and the treasurer/CFO o Identify the requisites to obtain a CMA certificate
Six Key Areas of Focus for organizations: Coping with COVID-19 Pandemic
By: Price Waterhouse and Coopers & Lybrand (PWC)
1. Crisis Management and response — The Covid-19

pandemic has brought fast-moving and unexpected
variables, some of which existing crisis plans and teams
weren't prepared to handle. Many companies
successfully developed management plans specific
to this crisis, and are now looking ahead.
2. Workforce — five workforce areas are emerging as
priorities for business leaders which are to protect people,
communicate effectively in global uncertainty; maintain the
continuity of work, assess workforce costs; and prepare for
recovery
3. Operations and supply chain — the ripple effects of the
covid-19 pandemic are difficult to model and assess, but global businesses can begin to mitigate supply
chain distributions.
4. Finance and liquidity — as business activities slow, some companies are seeing lower revenue resulting
in less cash flow. During the economic uncertainty, managing cash and liquidity positions may be
crucial in the weeks ahead.
5. Tax, trade and regulatory — navigating complexity and risk in today's global uncertainty takes more
than an understanding of tax and regulatory systems. It is critical that tax functions consider the broader
economic, political and societal context you operate in, in order to make informed and compliant
decisions that drive your operations forward.
6. Strategy and brand — as companies move from reacting to mitigating the impact of the outbreak,
strategies to emerge stronger may come in focus.
Managerial Accounting 1
INTRODUCTION
In life, we make decisions. People hired to manage the business have to make
decisions. For some, it takes a lot of time and effort to make a decision. In times of
dilemma, you are pressured to make a spur of the moment decision. Others consider
a lot of factors before they decide. They secure the right information needed to
support their decision. If they plan to expand their business, what type of information
do they need to get? If they plan to diversify their products, which product must be
given the first priority for production? Some stakeholders may ask "Is the company on
the red?" The phrase "on the red" is used to describe a business that is operating at a
loss. Naturally, you want to run your business profitably.
However, a newly opened business commonly finds itself on the red for a period of
time until it generates enough revenue to cover or even exceeds its expenses. If your
business is consistently operating on the red, this calls for your immediate action as it
scares away potential investors or creditors.
This book introduces the managerial use of accounting information which will be of
help in preparing you to become an effective manager by explaining how to make
intelligent, data-driven decisions. It covers the general overview of management
accounting, how it adds value to the company, and includes a thorough study of the
concepts, standards, techniques and methods which can be utilized by managers and
even management accountants. Managers must oversee the day-to-day activities and
keep the company functioning smoothly. Think about the various stakeholders who
will also use this information. In one way or another, these users of accounting
information tend to be concerned about their own interests in the entity.
The diversity of interested parties leads to a logical classification of accounting into
two
(2) main segments: financial accounting and management accounting. Hansen and
Mowen (1994:8) state that it is virtually impossible for managers to function without
accounting information. Managers need to know how to interpret and use such
accounting information. They need to understand accounting in order to fulfill certain
organizational roles and responsibilities such as to plan, organize, lead and control.
Harrison and Hongren (2001 :4) agrees with Hansen and Mowen (2005:4), in describing
accounting as an information system that measures business activities, processes
information into reports, and communicates the results to decision makers. Hence, the
ultimate purpose of management accounting is to aid in decision making.
The roles that management accountants play in their organizations, their leadership
position in cross-functional teams, and the skills required to meet the needs of the
changing business environment will also be discussed. Management accounting
provides the detailed analysis of the cost incurred and assist managers to develop
strategies in order to reduce costs and likewise increase profits. Costing is a function
which links both financial and management accounting. Without proper product cost
information, a manufacturing, wholesale or retail organization will not be able to
segregate the cost of sold and unsold outputs. Such segregation is essential to obtain
periodic measurement of the company's profitability.
Historical Development of Management Accounting

The history of management accounting will facilitate an understanding of the future of
this profession. Armstrong (1985) and Hopper et al. (1987) see management accounting
as an instrument that is used by management accountants to obtain positions of power.
Very little has been written on the usage history of accounting data for decision-making
purposes. It was this decision-making aspect that eventually led to the development of
management accounting. However, based on the study conducted by Adum Smith
Ovunda in 2015, there is no universally accepted view as to the origin and development
of Management Accounting. As a matter of fact, the issue of when management
accounting originated and the reason behind the development is still a source of
contention for years.
Define Management Accounting

In 1 981 , the Institute of Management Accountants or IMA (then the National
Association of Accountants) issued its first SMA (Statement on Management
Accounting) where Management Accounting (also known as Managerial Accounting)
was defined as the process of identification, measurement, calculation, analysis,
preparation, interpretation and communication of information used by management to
plan, evaluate and control within an entity and to ensure appropriate use of and
accountability for its resources. Management accounting also comprises the
preparation of financial reports for nonmanagement groups such as shareholders,
creditors, regulatory agencies, and tax authorities. Such definition explains the role of
the management accountant as an information provider, one who gathers, summarizes,
analyzes, and reports information to management decision makers—a role that has
largely been taken over by technology, e.g., highly integrated Enterprise Resource
Planning (ERP) systems. This has caused an "identity crisis" for the profession because
they are inconsistent with the views that practicing management accountants believe
in. The traditional role of management accountants as information providers has been
transformed to that of a strategic business partner. That prompted IMA to develop a
new definition to better represent and describe the role of today's management
accountant.
According to the Institute of Management Accountants (IMA), "Management
accounting is a profession that involves partnering in management decision making,
devising planning and performance management systems, and providing expertise in
financial reporting and control to assist management in the formulation and
implementation of an organization's strategy".
This new definition recognizes management accounting as a professional discipline that
has an integral role in formulating and implementing the company's strategy. Likewise,
it also recognizes the role of today's management accountant as part of the
management team working within the company at various levels: from support-level
accounting and finance professionals to top-level management. Every management
accountant is a vital team player who participates in strategic management decision
making, thus contributing to the company's success through the implementation of
the company's strategy.
Three (3) Pillars of Management Accounting
The basic function of management accounting is to assist the manager in performing
effectively its three (3) vital functions or activities: planning, controlling and decision
making. Planninq involves establishing goals and specifying how to achieve them. Plans
are often accompanied by a budget which is a detailed plan for the future that is usually
expressed in quantitative terms.
To carry out the manager's control function, he has to ensure that the plan is being
followed. Feedback is the key to effective control. Controllinq involves gathering
feedback to ensure that the plan is being properly executed or modified as
circumstances change. It is the process of keeping the company's activities on track. In
controlling operations, managers determine whether the planned activities are aligned
with the company's goals or objectives. If deviations exist. then the manager has to
decide what action must be taken or what changes must take place to get back on
track. In sophisticated entities, this feedback is provided by detailed reports of various
types. One of these reports, which compares budgeted to actual results, is called a
performance report. Performance report suggest where operations are not proceeding
as planned and where some parts of the company may require additional attention.
Decision making involves selecting a course of action from competing alternatives. It

is the outcome of the exercise of good judgment in planning, directing and controlling.
Similarities between Financial Accounting and Management Accounting

Both Financial Accounting and Management Accounting are widely recognized
and accepted fields of accounting. Hence, the following similarities are identified
as follows: I . Both rely on the same accounting information system (AIS)
2. Both rely heavily on the concept of responsibility or stewardship.
3. Both provide accounting information and generate reports intended for the
various stakeholders.
Differences between Financial Accounting and Management Accounting

There are a number of differences between financial accounting and managerial
accounting, which can be categorized as follows:
Managenal Accounting 4
Distinctions as to: Financial Mana ement Accountin
Accountin
Internal users like
Prima Users External users managers and officers
2. Types and frequency of Financial statements Internal reports tailored fit
reports covering the required to the needs of the
time period of the intended internal users
various prepared as frequently as
stakeholders needed
3. Purpose of generated re General-purpose Special purpose for specific
orts needs of intended users
4. Content of reports Pertains to business as a Highlights segment
whole and highly reporting; provides
aggregated (condensed) detailed and
disaggregated
information about a se
ment
5. Overriding Criteria Used Based on GAAP/PAS/PFRS Situational relevance or
usefulness; flexibility and
application of cost-benefit
anal sis
6. Primary Reporting Focus Focuses on the company as Focuses on a particular art
a whole a re ate or se ment
7. Behavioral Implication Measurement of economic Influence on managerial
behavior
8. Time Orientation Historical or Past Forward looking or future
Orientation Oriented
9. Flexibili of Informa tion Less flexible More Flexible
I O. Recordkeeping Formal recordkeeping Combination of formal and
informal recordkee in
I I . Basis in resentin data Based on ob•ective facts Based on facts or
estimates
12. Necessity of Financial Required or Mandatory Optional
Statement (FS)
Pre aration
As mentioned above, financial accounting is concerned with external reporting to
parties outside the firm while management accounting is primarily concerned with
providing information for internal management. Managerial accounting information is
intended to serve the specific and varied needs of management. Since managers are in
charged to do business planning, controlling, and decision making, they require
specialized reports, budgets, product costing data, and other details that are generally
not reported on an external basis.
Oftentimes, management may dictate the parameters under which such information is
to be accumulated and presented. That is their prerogative. Hopefully, internal
reporting is being done logically and rationally, hence it need not follow GAAP or any
particular set of mandatory guidelines. Management accounting is not mandatory in
the sense that a company is free to do as much or as little as it likes and no regulatory
bodies or
agencies specify what is to be done, or, for that matter, whether anything is to be done
at all. Management accounting is all about helping the stakeholders and the company
make the best decision possible given the information available to them.
While financial accounting reports tend to be based on historical data,

management reports are primarily forward-looking. Management accounting
reports are usually confidential and for internal use only, as opposed to financial
accounting statements, which are publically reported. Also, instead of being
calculated based on generally accepted accounting practices, they are calculated
based on management's informational needs.
Financial accounting information is case-based as it is computed by reference
to general financial accounting standards while management accounting
information is model-based as it is computed with reference to the needs of
individual manager, often using management information systems (MIS).
Financial accounting requires that records be kept with considerable precision which is
needed to keep the financial statements reliable whereas management accounting
frequently deals with estimates, rather than proven and verifiable facts.
Financial accounting requires that financial statements be issued following the end of
an accounting period while in management accounting, it may issue reports much more
frequently, for it to decide on a timely basis and keep the information relevant to the
individual managers.
Scope of Management Accounting

It makes use of information that is drawn from the company's accounting information
system and may even extend beyond the boundaries of traditional accounting. It has
played a secondary role to financial accounting and is considered by many as a
byproduct of the financial reporting process. It has a very wide scope incorporating
several disciplines which considers both monetary as well as non-monetary
information. Therefore, it includes all information which is provided to the management
for analysis and interpretation of the company's operations.
Skills of Management Accountants
You have just learned the basic anatomy of financial

reporting but that is not enough. The field of accounting
encompasses much more than just financial reporting.
You have to know also how to make use of the
information contained in those reports. Management
accounting jobs require that accountants exercise a
greater level of responsibility to internal business
stakeholders. The knowledge of broad business topics
such as economics and logistics as well as technical skills
helps a management accountant to suggest customized,
creative solutions for their employer and/or clients as well that align with the
company's goals. Business managers need accounting information to make sound
decisions for the best interest of those they're working for.
The role of management accountant requires a different set of skills. What skills are
important to be a management accountant? The skills or abilities we look for among the
management accountants which differentiate them from other business consultants in
the workplace are:
Business Acumen Skills. Develop your business acumen on a wide range of
managerial issues. What does business acumen mean? The word acumen means
"keenness and depth of perception particularly in practical matters." So business
acumen is an ability that allows you to understand and cope with different business
situations. It involves a wide complex of competencies, knowledge, and awareness of
multiple aspects of a business. If you have business acumen competency, it means you
understand how the business works! If you don't have financial skills, you will not be
able to understand the financial implications of your decision. This may result to wasted
resources, wrong decisions, missed opportunities and poor financial performance of
your organization.
Strategic Thinking Skills. Strategic thinking ought to be everyone's skill, not just
that of a CEO or leaders. It should be part of building your competencies. Be a strategic
thinker who looks far beyond the whole picture as you do long-term planning.
Accountants help companies of all sizes create strategic plans to maximize success or
limit chances of failure. You review and set goals and priorities as well as identify
potential risks and opportunities. As strategic thinker, you are creative, long-term
focused, adaptable, life-long learner. The top players in accounting are generally known
for their being visionary — for making logical decision that involves a bit of creativity. So
the ability to look ahead is the key.
Leadership Skills. Management accountants must have effective leadership skills

which means having a combination of many abilities that allow you to lead, motivate
or inspire people to shine. Being a good leader means knowing how to mentor and
teach,
and making yourself approachable and available to the people you're responsible for.
You have to balance being a role model and the person in charge while still being part
of the team. It also takes confidence, patience, and the ability to delegate — traits
which don't come easily to most people. The core leadership skills include organizing
skills, innovation skills, decision-making and problem-solving skills. Being well-
organized is a great way to demonstrate that you are reliable, competent and able to
get the job done. Start honing your organizational skills now.
Time Management Skills. Managing your workload is only effective if you also
know how to budget your time. As an accountant, you should know how to manage
competing priorities and juggle myriad tasks while completing everything on time. The
ability to work within deadlines and continually re-prioritize your to-do list will take
you far. Not only will it impress your boss, co-workers and clients, it will also help you
in maintaining a healthy work/life balance and keep your day-to-day productive.
Adaptability. The accounting industry is highly dynamic, so accountants who are
able to adapt quickly and easily are at a distinct advantage. Adaptable individuals are
more likely to learn and grow in their management accounting careers because they
see each new challenge as an opportunity to learn and test their skills. You have to
embrace change and learn to make the most of every curveball that your work throws
your way. If something unexpected happens, look for the opportunity in the situation.
Analytical Skills. Having a strong analytical skill is one of the crucial skills in the
workplace. Analytical skills refer to your ability to collect and gather the right
information required for a specific situation, visualize and analyze information in
details. It will also include your ability to see a problem or situation from different
points of view. It can be improved through constant practice. Remember, the quality
of life depends on the quality of our logical and analytical thinking and on how good
we are in decision-making and problem-solving. All these skills can be learned,
developed and enhanced!
Technical Skills. Many accounting jobs require technical skills which will enable
you to apply your accounting knowledge, work with spreadsheets, perform research
and review the accounting or finance work of others. Such skills are initially acquired
or developed in your undergraduate years of study and further enhanced as you
acquire practical work experience in various sectors.
Interpersonal Skills. Well-developed interpersonal skills will also be useful for

networking. Whether you have to attend a corporate function or are simply welcoming
a new coworker to the office, the ability to assert yourself when meeting new people
in order to establish harmonious relationship will serve you well. Never underestimate
the importance of making a good first impression.
Communication Skills. No matter where you work, what your job entails or who
you work with, strong communication skills are incredibly valuable. Being able to
communicate well in writing and in person will help you to get a job, work as a team
with
your colleagues and interact with clients. Communicate clearly and tactfully with the
people around you.
Role of Management Accountant
Management accountants are identified as "value-creators" among the circle of
accountants. This is so because they are forward-looking and take decisions that will
affect the future of the organization rather than doing the scorekeeping aspects of the
profession. Knowledge and experience in management accounting can be obtained
from various fields and functions within an organization.
Management accountants are key figures in determining the status and SUCCess of a
company. Some choose to become a Certified Management Accountant (CMA), a
similar credential to CPA, but with a greater focus on cost accounting, financial
planning, and management issues. Management accountants will be presented with
many opportunities for innovative actions in the global economic environment. In
addition to their role of providing accurate, timely and relevant information,
management accountants are expected to participate as business consultants and
partners with management in the strategic planning process.
In practice, the management accountant is asked to work directly under the Managing
Director or Chief Executive Officer (CEO).The functions of management accountant
depend upon his status in the organization, agreement with the organization,
experience and capacity of the management accountant. He has to prepare the
necessary procedures to implement the plan effectively. The top management
requests the management accountant to prepare the report for the root causes of an
unfavorable event or operations. In this report, the accountant can pinpoint the real
reasons and the persons who are responsible. He has to evaluate the effectiveness of
policies, organization structure and procedures adopted for attaining the objectives.
He has to advise management in order to improve the performance of operations. He
will have to supervise all the statements and returns which are to be submitted to the
government periodically within the due date. The extent of impact of policy changes
and amendments has to be assessed by the management accountant. He has to make
economic appraisal and find the influence of economic condition over the business
activities. In this aspect, he can prepare a report to be submitted to top management
along with his comments. The management accountant keeps a record of the functions
that take place in the company. For example, it keeps a track record of the work in
progress and the stage of completion attained. Further, it also helps in calculating and
analyzing the cost of production for the month. Through an effective management
accounting system, it is possible to enhance the overall performance of the company.
Professional Designations
There are two (2) major professional designations for management accountants which
may help you earn a higher salary. First is the Certified Management Accountant
(CMA) designation offered by the Institute of Management Accountants (IMA) where
you are required to complete a bachelor's degree, pass the two-part CMA exam and
acquire two continuous years of professional experience in management accounting
or financial
management. The professional status of management accounting is affirmed by the
fact that management accountants undergo a rigorous exam to qualify as Certified
Management Accountant (CMA). Considerable prestige is attached to the professional
designation of CMA. According to IMA's 2019 Global Salary Survey, the median total
compensation is 55% higher for CMAs over non-CMAs. CMAs of all ages earn more
than non-CMAs. Those aged 30-39 receive a median salary 61-67% greater than their
nonCMA peers. CMAs believe their certification creates career opportunities and
strengthens their ability to move across business areas.
Second is the Chartered Global Management Accountant designation offered by the
American Institute of CPAs in conjunction with the London-based Chartered Institute
of Management Accountant. This credential was offered since January, 2012. At its
inception, the CGMA program offered the credential based on experience alone: as of
2015, there is also an exam requirement. The CGMA exam has been specifically
engineered to test candidates' readiness in offering insights and making decisions in
realworld business scenarios by evaluating your abilities in applying theoretical
knowledge.
As advanced credentials, the CGMA letters after your name will add power to your
resume by demonstrating to employers that you have strong business acumen,
experience, ethics, commitment, and skills. In addition, becoming a CGMA will connect
you with a global community of other management accountants to share practices,
create innovation, conduct research, and better prepare you for global challenges. In
201 4, CIMA created the Global Management Accounting Principles (GMAPs), the
result of research from across 20 countries in five continents. The principles aim to
guide the best practices in the discipline. For more information, visit these websites:
www.cgma.org or www.imanet.org or www.cimaglobal.com
Career Path of Management Accountants

Many people are looking for a career path that combines good financial incentives with
a sustainable work-life balance. A management accountant's role includes diverse
responsibilities, such as advising managers about the financial implications of projects,
formulating business strategies to negotiate a competitive landscape, conducting
internal business audits and monitoring corporate spending. To guide strategy, a
proactive and forward-looking attitude is essential. Management accountants are
increasingly called upon to advise the board and guide effective decision-making.
Work experience, preferably in the business or financial sector, is important in
demonstrating your willingness to learn and develop your knowledge of the business
environment. As they gain experience, they are given more responsibility and are often
put in charge of others.
Many of the entry-level staff accountants have only bachelor's degrees. High-end
management consultants tend to have Master of Business Administration (MBA) or
Master of Accountancy degrees. Almost without exception, public accounting firms
want new
hires to have passed the Certified Public Accountant (CPA) exam, or at the very least,
be eligible to take it.
Nobody starts as a controller immediately after getting a CPA license, and it can take
several years of dedicated work to earn the title. Many controllers spent years as
auditors or accountants with local accounting, auditing or consulting firms.
Contemporary controllerships actually begin after a few years as an assistant
controller. Some employers place special emphasis on industry experience. This
diversity makes it possible to ascend to a controller position.
CMAs are employed by a vast number of different industries. Most of them work in
general accounting and finance, but many also have management roles. They work in
a wide variety of work places such as family-run businesses, commercial
establishments, manufacturing firms, export processing zone, small and large publicly
listed companies and multinational corporations. There are also CMAs in not-for-
profit organizations, government and academic institutions. Private companies are
where a management accountant thrives. As an independent adviser, you might be
able to work with smaller companies on a consultancy basis but as the company
expands, they will move towards having an internal management accounting team.
Controller vs. Treasurer/CFO
There is a distinction between the treasury function (focuses on cash flow) and
financial reporting function of the controller. Treasury functions include cash
management, investment and debt management, financial risk management and
investor relations. It may also deal with complex financial areas such as foreign
exchange rates, derivatives and interest rate swaps, among other things. Both the
treasurer and controller are responsible to the top management.
Cash management includes electronic banking, liquidity management as well as

payments and collections processing. It will also include arranging for financing, bank
account management, consolidation of cash forecasts, forecasting short-term and
longterm fund requirements, investing surpluses, and managing cash across various
countries whenever applicable. These functions may vary depending on the nature of
industry or business. Also consider the company's requirement, as the treasurer can
act within the defined scope of his authority.
Investment and debt management shall include bank borrowing, implementation of
the dividend policies approved by the BOD, investment in marketable securities, sale
and redemption of issued instruments as well as stock and bond issuance. Financial
risk management will include liquidity risk, credit risk, currency risk, interest rate risk
and share value risk.
In many organizations, the designation chief finance officer (CFO) is given to the
executive responsible for all accounting and finance functions. In small companies, they
are oftentimes called controller or in non-profit or governmental organizations, they
are called the comptroller. In some companies, the controller is called Chief Accounting
Officer who is responsible for the maintenance of adequate internal control and for the
preparation of accounting records. A controller is also required to be a licensed CPA,
with an extensive experience in accounting and finance jobs as he will be mainly
responsible for internal and external financial reporting, analysis, and such other
internal finance functions.
The CFO is the organization's top managerial and financial accountant. He is responsible
for supervising the accounting and finance personnel throughout the company and for
preparing the information and reports used in both managerial and financial
accounting. The controller is the chief accountant of the company who supervises his
accounting staff and oversees the preparation of financial reports. In large entities, the
controller reports to the chief finance officer (CFO). However, in small entities, the
controller may be assigned as the head of the Finance Department. He also takes part
in analyzing financial data, as well as in preparing the budget. He is also in charge of the
company's tax compliance and see to it that deadlines and regulations are strictly
followed. As the organization's chief management accountant, the CFO interprets
accounting information for line managers and participates as an integral member of the
management team.
Generally, the treasurer has the custody of the company's funds entrusted to his care
and responsible for planning and controlling the company's cash position. He serves as
the protector of the company's finances from financial risks that arises from business
activities. Traditionally, a treasurer is under the Accounting Department, but has now
been renamed as a new segment called Treasury Department. The treasury department
is responsible for the timely availability of funds needed to support the business. Actual
performance should be compared with the targeted performance to evaluate how the
treasury department has functioned during the period.
The duties of a treasurer include interacting with shareholders, bankers, current and
potential investors. He is primarily responsible for obtaining investment capital and
managing the cash flow of the business. He takes charge of obtaining loans and credit
from outside sources. He builds and maintain healthy business relationships with banks
and other lending institutions and raise equity capital. He is responsible for investing
the company's funds making sure that financial goals are met and communicating with
shareholders. The Treasurer is also responsible for ensuring that effective financial
systems and procedures have been established, consistently followed and are in line
with best practices and legal requirements. The financial duties undertaken by his
personnel in the Treasury Department should reflect levels of authority and
responsibility. He should identify which tasks need to be performed, who will undertake
the tasks and how will they be monitored.
Most CFOs and controllers are involved in planning and decision making at all levels
and across all functional areas of the entity. This broad role has enabled many
managerial accountants to rise to the top level of the hierarchy. Former accountants
have served as top executives in companies like General Motors, Singer, and General
Electric Corp.
Shown below are the functions of the controller and the treasurer summarized in table
form:
PLANNING & CONTROLLING CAPITAL PROVISION
REPORTING AND INTERPRETING INVESTOR RELATION
EVALUATING AND CONSULTING SHORT-TERM FINANCING
TAX ADMINISTRATION BANKING AND CUSTODY
GOVERNMENT REPORTING CREDITS AND COLLECTION
ASSET PROTECTION INVESTMENT
APPRAISING THE ECONOMY INSURANCE
CMA Certification
In the corporate accounting world, CMA is a highly respected professional designation.
It is an advanced professional certification designed specifically to measure the critical
accounting and financial management skills. Institute of Management Accountants
(IMA) will help you explore the different career paths in accounting. Management
accounting careers are very broad and you don't have to be a public accountant. Job
satisfaction is higher in management accounting practice. For almost 50 years, the
CMA certification has been the global benchmark for management accountants and
financial professionals. Why? Because CMAs can explain the 'Why" behind the
numbers, not just the 'What." and that can give you greater credibility, higher earning
potential, and ultimately a seat at the leadership table. You need the internationally
recognized CMA certification to get better-paying jobs. According to a comprehensive
study by the IMA, CMA certification holders earn 67% more than their non-certified
counterparts. Pinoy employers gradually recognize the value of CMAs particularly in
consulting firms that aimed to close the skills gap and gain a competitive edge in the
market, encourage their staff to earn the CMA certification.
Globally, IMA supports the profession through research, the CMA@ (Certified
Management Accountant) program, continuing education, networking and advocacy of
the highest ethical business practices. IMA has regional offices in eight cities outside
the United States: three in China, two in Europe, one in India, one in Singapore, and one
in Dubai. Today, more than half of IMA's approximately 120,000 members outside the
U.S. IMA has a global network in 140 countries and 300 professional and student
chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services
through its four global regions: The Americas, Asia/Pacific, Europe, and Middle
East/Africa. For more information about IMA, please visit www.imanet.org. Are you
ready now to assess your skills, plan your career path and see your future?
ICMA conducted the latest job analysis study in the first half of 2018. The purpose of
this study was to confirm that the CMA exam continues to test the knowledge and skills
that are most important for management accounting and finance professionals. The
results of this study will be reflected in the CMA exam effective January 2020.
COMPANY'S CODE OF ETHICS
Ethics is a vital component of a company's culture. Cultivating an ethical culture—
defined as a set of shared attitudes, values, goals, and practices that characterize an
institution or organization—is a key SUCCeSS factor that contributes to a company's
competitive advantage and ability to create long-term value. That's why each entity's
code of conduct should carefully express its core values, evidenced by a commitment
to upholding the highest ethical standards.
It is the responsibility of the employer to foster a corporate climate that supports
ethical behavior by all employees. This is achieved by continuous training in the ethical
policies and guidelines of the company, positive reinforcement of ethical actions and
exercises ethical leadership by example. Behavior modification is the act of shaping
how employees should behave in the workplace and bring out the best in them which
will ultimately benefit the company as well. Most managers practice behavior
modification by using positive reinforcement such as rewarding those who excel and
providing them a merit pay incentive. Warnings and suspension of employment are
examples of behavior modification through negative reinforcement. Such modification
techniques may either encourage or discourage behaviors in the workplace. Ethical
issues come into play when you consider possible adverse effects of behavior
modification on other employees in the office and your own ability as a manager to use
positive and negative reinforcement objectively.
Employees can make better decisions in less time with business ethics as a guiding
principle. This will lead to increased productivity and overall employee morale.
Infraction of the company policy may call for a need to conduct an internal audit, take
appropriate legal action and instituting corrective actions. These consequences will
most certainly have a financial impact due to time and costs involved, and may also
negatively impact employee morale as business operations are strained under the
pressure. Noncompliance with ethical standards may destroy the image or reputation
of the business, the consequences of which may include loss of customers, employee
turnover and loss of staff loyalty.
Ethical Standards set by IMA
Ethics, in its broader sense, deals with human conduct in relation to what is morally
good or bad, right or wrong. Due to the relevance of the accounting information
provided, management accountants should observe certain professional ethical
standards. IMA is a member organization of the International Federation of
Accountants (IFAC) and it provides ethical standards for practitioners of Management
Accounting and Financial Management to govern their professional career. Setting
professional ethical standards is important because:
+ they provide trust in the employee-employer relationship;
+ standards represent a reference for management accountants facing ethical
dilemmas;
+ they provide a guarantee as to the quality of the information provided to the
various users.
IMA's ethical principles are based on honesty, fairness, objectivity and responsibility.
IMA members who constantly face ethical dilemmas must use these ethical principles
every time they engage in accounting services for their company and the general
public. For example, if the accountant's immediate superior instructs the accountant
to record inventory at original cost when it is obvious that the inventory has a reduced
value due to obsolescence, what should the accountant do? To help make such a
decision, the decision maker must then estimate the outcome of the decision and be
responsible for its results. When faced with an ethical dilemma, ask these questions:
"Will my actions be fair and just to all the parties affected?" and "Would I be pleased
to have my closest friends learn of my actions?"
To determine whether a decision is good or bad, the decision maker must compare
his/her options with some standard of perfection. This standard of perfection requires
the decision maker to assess the situation and the values of the parties affected by the
decision. Practitioners in management accounting and financial management have a
unique set of circumstances relating to their employment. To help them assess their
situation, the IMA Helpline is designed to provide clarification of provisions in the IMA
Statement of Ethical Professional Practice, which contains suggestions on how to
resolve ethical conflicts. The helpline cannot be considered a hotline to report specific
suspected ethical violations.
COMPETENCE CONFIDENTIALITY
INTEGRITY CREDIBILITY
Figure I. The Ethical Standards set by IMA
The Statement of Ethical Professional Practice sets forth principles and standards for
the ethical conduct of accounting and finance professionals, and all IMA members are
expected to abide by them no matter what country or region they're in. Practitioners
of management accounting and finance professionals have an obligation to the public,
their profession, the organization they serve, and themselves to maintain the highest
standards of ethical conduct. IMA's first code of conduct for members was issued in the
1 980s. In 2005, the original IMA Statement of Ethical Professional Practice was created
as a response to the Sarbanes-Oxley Act of 2002. This was followed by a revised version
in 201 7 that's shorter and easier to apply and reflects a more principles-driven
approach.
The ethical standards set by IMA as shown in Figure I are: competence, confidentiality,
integrity and credibility. Competence is an accountant's ability to use professional
expertise and develop his accounting knowledge and skills. Confidentiality requires
accountants to disclose information only at their supervisor's discretion. Integrity
prohibits managerial accountants from engaging in unethical conduct. Credibility refers
to the accountant's ability to communicate accounting information fairly and
objectively to all business stakeholders.
The sources of ethical problems can be: (1) the management's expectations opposed
to the principles of professional ethics; (2) the desire to be promoted; (3) the desire to
earn money quickly; and (4) personal obligations. Unlike external auditors,
management accountants are employees of the company and due to this aspect, the
company expects them to be loyal. Managers who want to be appreciated by the Board
of Directors may put pressure on the accountant in order to make a facelift of the
financial statements. Many times, accountants are tempted to give in to such
pressures. Accountants have the obligation to present the statement of financial
position in which they should depict the financial status or condition of the company
with maximum accuracy, even if this is not in favor of the management team or of the
company itself.
IMA Statement of Ethical Professional Practice

Members of IMA shall behave ethically. A commitment to ethical professional
practice includes overarching principles that express our values and standards that
guide our conduct.
Principles
IMA's overarching ethical principles include: Honesty, Fairness, Objectivity,
and Responsibility. Members shall act in accordance with these principles and
shall encourage others within their organizations to adhere to them.
Standards
A member's failure to comply with the following standards may result in disciplinary
action.
I. Competence
Each member has a responsibility to:
. Maintain an appropriate level of professional expertise by continually developing
knowledge and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
3. Provide decision support information and recommendations that are accurate,
clear, concise, and timely.
4. Recognize and communicate professional limitations or other constraints that
would preclude responsible judgment or successful performance of an activity.
Il. Confidentiality
1 . Keep information confidential except when disclosure is authorized or legally
required.
2. Inform all relevant parties regarding appropriate use of confidential
information. Monitor subordinates' activities to ensure compliance.
3. Refrain from using confidential information for unethical or illegal advantage.
Ill. Integrity
I. Mitigate actual conflicts of interest. Regularly communicate with business
associates to avoid apparent conflicts of interest. Advise all parties of an potential
conflicts.
2. Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
3. Abstain from engaging in or supporting any activity that might discredit the
profession.
IV. Credibility
1. Communicate information fairly and objectively.
2. Disclose all relevant information that could reasonably be expected to influence
an intended user's understanding of the reports, analyses, or recommendations.
3. Disclose delays or deficiencies in information, timeliness, processing, or internal
controls in conformance with organization policy and/or applicable law.
Resolution of Ethical Conflict
In applying the Standards of Ethical Professional Practice, you may encounter problems
identifying unethical behavior or resolving an ethical conflict. When faced with ethical
issues, you should follow your organization's established policies on the resolution of
such conflict. If these policies do not resolve the ethical conflict, you should consider
the following courses of action:
1. Discuss the issue with your immediate supervisor except when it appears that
the supervisor is involved. In that case, present the issue to the next level. If you
cannot achieve a satisfactory resolution, submit the issue to the next
management level. If your immediate superior is the chief executive officer or
equivalent, the acceptable reviewing authority may be a group such as the audit
committee, executive committee, board of directors, board of trustees, or
owners. Contact with levels above the immediate superior should be initiated
only with your superior's knowledge, assuming he or she is not involved.
Communication of such problems to authorities or individuals not employed or
engaged by the organization is not considered appropriate, unless you believe
there is a clear violation of the law.
2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA
Ethics Counselor or other impartial advisor to obtain a better understanding of
possible courses of action.
3. Consult your own attorney as to legal obligations and rights concerning the
ethical conflict.
Accountants who fail to abide by the IMA's accounting ethical code face a variety of
punishments. Accountants may lose their professional certification, be removed from
accounting positions and face legal penalties depending on their inappropriate actions.
Managerial accountants who do not disclose inappropriate accounting operations in
their company also can be held liable. Maintaining the general public's trust in
companies is a primary responsibility of management accountants.
Higher educational institutions play an important role in cultivating the values of
professional ethics. Business schools have instituted mandatory courses on ethics,
professional responsibility, or corporate social responsibility. Universities should
provide an ethical culture and cultivate ethical values. They should provide greater
emphasis on integrating ethical concepts into non-ethics classes such as accounting
and management. It may give students not just a personal commitment to ethics but
also provide the tools they need to change the environment they will later work in, to
create more ethical organizations as they ascend to leadership position. In the last
decade, a new problem raised worldwide was that of the adaptation of the university
curricula by including aspects of professional ethics.
Whistleblowing
Whistleblowing is the act of reporting suspected wrongdoing at work to draw the
attention of somebody in authority or even drawing public attention. Corruption,
fraud, bullying, health and safety violation, cover-ups and discrimination are common
activities highlighted by whistleblowers. This is making a disclosure in the public
interest. As with conflict of interest, gifts and hospitality should not be accepted or
offered if they are likely to compromise you or your firm's impartiality or integrity.
Whistleblower is a person who exposes any kind of information or activity that is
deemed illegal, unethical, or not correct within an organization that is either private or
public. Sometimes they are regarded as selfless martyrs for public interest and
organizational accountability; others view them as "traitors" or "defectors." Some even
accuse them of solely pursuing personal glory and fame, or view their behavior as
motivated by greed. They can be employees, suppliers, contractors, clients or any
individual who somehow becomes aware of illegal activities taking place in a business
either through witnessing the behavior or being told about it.
Whistleblowers face legal action, criminal charges, social stigma, and termination from
any position, office, or job. Whistleblowers are often protected under law from
employer retaliation, but in many cases punishment has occurred, such as termination,
suspension, demotion, wage garnishment, and/or harsh mistreatment by other
employees. Many whistleblowers have stated that they were motivated to take action
to put an end to unethical practices, after witnessing injustices in their businesses or
organizations. A 2012 study identified that individuals are more likely to blow the
whistle when several others know about the wrongdoing, because they would
otherwise fear consequences for keeping silent. In cases when one person is causing
an injustice, the individual who notices the injustice may file a formal report, rather
than confronting the wrongdoer, because confrontation would be more emotionally
and psychologically stressful. Others
may be motivated to report unethical behavior when they believe that their company
will support them. Professionals in management roles may feel responsibility to blow
the whistle in order to uphold the values and rules of their organization. Questions
about the legitimacy of whistleblowing, the moral responsibility of whistleblowing, and
the appraisal of the institutions of whistleblowing are part of the field of political ethics.
As workers attempt to address concerns, they are often met with a wall of silence and
hostility by management. Some whistleblowers speak of overwhelming and persistent
distress, drug and alcohol problems, paranoid behavior at work, acute anxiety,
nightmares, flashbacks, posttraumatic stress disorder and intrusive thoughts.
Depression is often reported by whistleblowers, and may even lead to suicidal
attempts. General deterioration in health and self-care has been described. Increased
stress related physical illness has also been described in whistleblowers.
Retaliatory actions include laying off the employee, reducing the employee's pay,
cutting back his hours, moving the employee to another job that is, in effect, a
demotion. Other actions that affect the employee's current or future employment
status or work environment can also be considered retaliatory. The stresses involved in
whistleblowing can be huge. As such, workers remain afraid to blow the whistle, for
fear that no one will believe them or they have lost faith in believing that anything will
happen if they do speak out. Loss of job, questioning the whistleblower's mental health,
vindictive tactics to make the individual's work more difficult and/or insignificant,
character assassination, formal reprimand, and difficult court proceedings may happen.
The ethical implications of whistleblowing can be negative as well as positive.
Sometimes employees may blow the whistle as an act of revenge. The negative results
of being a whistleblower could be one being seen as a traitor, a hero, or just one of the
majority whistleblowers who are simply disgruntled with a perceived but not true
unfairness. The list of negative consequences to whistleblowing seems endless.
Companies should offer financial as well as non-financial reporting incentives, such as

cash rewards or extra vacation days, for whistleblower reports that lead the company
to identify suspected unethical or unlawful activity. External whistleblowers report
misconduct to outside persons or entities. In these cases, depending on the
information's severity and nature, whistleblowers may report the misconduct to
lawyers, media, law enforcement or watchdog agencies. In some cases, external
whistleblowing is encouraged by offering monetary reward. Anonymous reporting
mechanisms help foster a climate whereby employees are more likely to report or seek
guidance regarding potential or actual wrongdoing without fear of retaliation. The
coming ISO 37001 — antibribery management systems standard, includes anonymous
reporting as one of the criteria for the new standard.
Situations in which a person may blow the whistle are in cases of violated laws or
company policy, such as sexual harassment or theft but these instances are small
compared to money laundering or fraud charges on the stock market. Whistleblowing
in the private sector is typically not as high-profile or openly discussed in major news
outlets, though occasionally, third parties expose human rights violation and
exploitation of workers.
Exercise 1-1
Divide the class into five (5) groups and assign the following graded group activities:
Group # Group Learning Activities
Demonstrate the various roles of a management accountant in an organization.

2 Demonstrate your understanding about the functions of the controller and the
treasurer.
3 Demonstrate your knowledge on how to construct a concept map about the code
of ethics in your college or university and explain it to the class. Identify also the
common violations that you have encountered in the school campus and provide
recommendations to address or resolve such issue/s.
4 Prepare a talk show with an audio-video clip where you will summarize the
important facts about CMA certification.
5 Demonstrate your understanding of the importance of upholding and applying

such ethical standards. Prepare a case study on ethical dilemmas of professional
accountants in commerce and industry.
Exercise 1-2 (True or False)
Instruction: Encircle the numbers with false statements. (False — Bold items)
Managerial Accounting emphasizes precision and company wide reports.

2. Scandals have served as a wake-up call to concentrate more on ethical issues
in practicing and teaching accounting.
3. The primary interest of management accounting is the company as a whole while
in financial accounting, segmented reporting is of primary importance.
4. Generally, the larger the organization is, the greater is management's need for
information.
5. Controllership is generally an accounting function involving but not limited to
planning for control, management and internal audit, tax administration and credit
and collections.
6. The focus of managerial accounting is only over that of a particular accounting
period.
7. In many organizations, the designation given to the executive responsible for all
accounting and finance functions is the chief financial officer (CFO) who is
sometimes called the controller in smaller companies or the comptroller in
nonprofit or government organizations.
8. The CFO is typically involved in only accounting and short term management
activities and is not involved in the long term strategy of the company.
9. Financial Accounting needs to adhere to Generally Accepted Accounting Principles
while for Management Accounting, there is no guides or restrictions as long as
information must be useful and is generated to satisfy managers information
needs.
10. Financial Accounting generally uses historical peso while Management Accounting
uses any monetary or physical measurements.
I l . Managerial accounting is manager-oriented therefore its study must be preceded
by some understanding of what managers do, the information managers need, and
the general business environment.
1 2. Controllers are responsible for the financial accounting reporting, analysis and
interpretation to the executive management team.
1 3. The three (3) pillars of management accounting are planning, directing and
controlling.
1 4. The CFO does not interpret accounting information for line managers even though
he participates as an integral member of the management team.
1 5. Treasurership is generally a finance function, which includes but not limited to
investor relations, capital provisions, insurance and economic appraisal.
Exercise I -3 (Multiple Choice)
Instruction: Encircle the letter of your chosen answer. Avoid erasures.
Which of the following best describes the nature of Financial Accounting,

Management Accounting and Cost accounting?
Financial Management Cost Accounting
Accounting Accounting
a. Historical Historical Historical
b. Historical Estimates, Futuristic and Historical

Pragmatic
c. Historical Estimates, Futuristic and Estimates, Futuristic

Pragmatic and Pragmatic
d. Estimates, and Historical Historical
Futuristic
Pragmatic
e. Estimates, and Estimates, Futuristic and Historical
Futuristic Pragmatic
Pragmatic
2. Controller as a Top Management Accountant will make decisions in all phases of
their managerial functions. Which of the following does not properly described
its basic functions?
a. They can be routinary or nonroutinary decisions and can be both dealing
short term and long term objectives of the business.
b. If the decisions are routinary in nature, they can be easily predicted,
standardized, planned and easily controlled.
c. Routinary decisions are normally operating in nature and relate with
working capital cycle involving transactions with suppliers, customers,
employees etc.
d. Decisions which are non-routinary are normally guided by written policies
that will not highly require value judgment of the implementing manager.
e. Short term goals may likely involved liquidity, profitability and working
capital policies while strategic deals with stability and growth.
3. Which of the following items is/are responsibilities of Management

Accountants: I — Providing reports to management, shareholders, creditors and
governmental agencies
Il — Interpreting and providing internal and external information pertinent to
the various segment of the organization.
— Establishing systems which facilitate planning and control of the firm's
resources, excluding tax planning and compliance.
IV - Designing and developing overall management information system.
V — Application of internal audit procedures to assure the accuracy and
reliability of information derived from the accounting system and related
sources.
a. Only one item
b. Only two items
c. Only three items
d. Only four items
e. All of the items are correct
4. Under the IMA's Code of Conduct for Management Accountants, which of the
following does not describe INTEGRITY?
a. Abstain from engaging in or supporting any activity that might discredit
the profession.
b. Disclose all relevant information that could reasonably be expected to
influence an intended user's understanding of the reports, analyses or
recommendations.
c. Mitigate actual conflicts of interest. Regularly communicate with business
associates to avoid apparent conflicts of interest
d. Refrain from engaging in any conduct that would prejudice carrying out
duties ethically.
e. All of the above describes integrity.
5. A division manager has concerns about the commercial potential of a software

product for which development costs are currently being capitalized as an asset
rather than being shown as an expense for internal reporting purposes. The
manager's bonus is based, in part, on division profit. The manager argues that
showing development costs as an asset is justified because the new product will
generate profits but presents little evidence to support his argument. The last
two products from this division have been unsuccessful. The management
accountant disagrees but wants to avoid a difficult confrontation with the boss,
the division manager.
Based on the above problem, the management accountant is faced
with an ethical dilemma about.
a. Competence and Integrity only
b. Competence and Credibility only
c. Integrity and Credibility only
d. Confidentiality, Integrity and Credibility only
e. Competence, Integrity and Credibility only
6. A packaging supplier, bidding for a new contract, offers the management
accountant of the purchasing company an all expense paid weekend to the
Super Bowl. The supplier does not mention the new contract when
extending the invitation. The accountant is not a personal friend of the
supplier. The accountant knows cost issues are critical in approving the
new contract is concerned that the supplier will ask for details about bids
by competing packaging companies. Based on the case above what ethical
dilemma where in the management accountant is facing?
a. Integrity and Credibility
b. Confidentiality and Credibility
c. Confidentiality and Integrity
d. Competence and Integrity
e. Competence and Confidentiality
7. Every Carolinian is expected to personify "Scientia, Virtus, Devotio". The

University Motto was incidentally aligned to the Ethical Standards for
Management Accountants. Which of the following statements are true?
I— To be competent (scientia) , a management accountant should
perform their professional duties in accordance with relevant laws,
regulations and technical standards.
Il — Integrity (virtus) means to recognize and communicate professional
limitations or other constraints that would preclude responsible
judgment or successful performance of an activity.
Ill — To be objective (devotio), all relevant information must be fully
disclosed that could reasonably be expected to influence an intended
user's understanding.
a. Only one statement is true
b. Only two statements are true
c. All of the statements are true
d. None of the above
8. Richmond Company operates a chain of 44 department stores. Two years ago,
the board of directors of Richmond approved a large scale remodelling of its
stores to attract a more upscale clientele.
Before finalizing these plans, two stores were remodelled as a test. Linda
Halili, assistant controller, was asked to verse the financial reporting for these
test stores, and she and other management personnel were offered bonuses
based on the sales growth and profitability of these stores. While completing the
financial reports, Halili discovered a sizable inventory of outdated goods that
should have been discounted for sale or returned to the manufacturer. She
discussed the situation with her management colleagues; the consensus was to
ignore this inventory as obsolete because it would diminish the financial results
and their bonuses. Which of the following is correct with regards the failure to
report the nature of the inventory.
a. It violates the IMA's Statement of Ethical Professional Practice of

Competence as it fails to prepare decision support information that is
accurate.
b. It violates the IMA's Statement of Integrity as it promotes in engaging a
conduct that would prejudice carrying out duties ethically.
c. It violates the IMA's Statement of Credibility as it does not communicate
information fairly and objectively.
d. Only A and B
e. Only A, B and C
9. Bambam is a financial manager who has discovered that her company is violating
environmental regulations. If her immediate superior is involved, her
appropriate action is to:
a. Confront her immediate superior.
b. Present the matter to the next higher managerial level.
c. Do nothing since she has a duty of loyalty to the organization.
d. Consult the audit committee.
10. In which situation is a financial manager/management accountant permitted to
communicate confidential information to individuals or authorities outside the
firm?
a. The financial manager/management accountant knowingly
communicates the information indirectly through a subordinate.
b. An officer at the financial manager/management accountant's bank
has requested information on a transaction that could influence the
firm 's stock price,
c. There is an ethical conflict and the board has refused to take action.
d. Such communication is legally prescribed.
1 1 . The Standards of Ethical Conduct for Practitioners of Management Accounting
and Financial Management contains a policy regarding confidentiality that
requires that management accountants:
a. refrain from disclosing confidential information acquired in the course of
their work except when authorized by management, unless legally
obligated to do so
b. refrain from disclosing confidential information acquired in the course of
their work in all cases since the law requires them to do so.
c. refrain from disclosing confidential information acquired in the course of
their work except when authorized by management
d. refrain from disclosing confidential information acquired in the course of
their work in all situations
12. If a financial manager or management accountant has a problem in identifying
unethical behavior or resolving an ethical conflict, the first action(s) he should
normally take is to
a. Consult the board of directors.
b. Resign from the company.
c. Discuss the problem with his/her immediate superior.
d. Notify the appropriate law enforcement agency.
13. The Code of Ethics for Management Accountants includes a competence
standard, which requires the financial manager/management accountant to
a. Discuss ethical conflicts and possible courses of action with an unbiased
counselor.
b. Report information, whether favorable or unfavorable.
c. Develop his/her professional proficiency on a continual basis.
d. Discuss with subordinates, their responsibilities regarding the disclosure
of information about the firm.
14. The Code of Ethics for Management Accountants includes an integrity standard,
which requires the financial manager/management accountant to
a. Disclose confidential information when authorized by his/her firm or
required under the law.
b. Refuse to accept gifts from anyone.
c. Identify and make known anything that may hinder his/her judgment or
prevent satisfactory completion of any duties.
d. Report any relevant information that could influence users of financial
statements.
15. Engaging in or supporting an activity that would discredit the profession would
relate to which part of the IMA Code of Conduct?
a. competence c. independence
b. credibility d. integrity
16. Integrity is an ethical requirement for all financial managers/management
accountants. One aspect of integrity requires
a. Performance of professional duties in accordance with applicable laws.
b. Maintenance of appropriate level of professional competence.
c. Avoidance of conflict of interest.
d. Refrain from improper use of inside information
17. Under the express terms of the Code of Ethics for Management Accountants, a
financial manager/management accountant may not
a. Disclose confidential information unless authorized or legally obliged.
b. Accept other employment while serving as a financial
manager/management accountant.
c. Advertise
d. Encroach on the practice of another financial
manager/management accountant.
18. A financial manager/management accountant discovers a problem that could
mislead users of the firm's financial data and has informed his/her immediate
superior. He/She should report the circumstances to the audit committee
and/or the board of directors only if
a. The immediate superior, who reports to the CEO, knows about the
situation but refuses to correct it.
b. The immediate superior assures the financial manager/management
accountant that the problem will be resolved.
c. The immediate superior reports the situation to his/her superior.
d. The immediate superior, the firm's CEO, knows about the situation, but refuses
to correct it.
19. The Standards of Ethical Conduct for Practitioners of Management Accounting

and Financial Management states that significant ethical issues should be
discussed first with an immediate superior unless the superior is involved. If
satisfactory resolution cannot be achieved when the problem is initially
presented, then the issues should be:
a. submitted to the audit committee, executive committee, board of
directors, or owners
b. submitted to the next higher managerial level
c. submitted to the CEO of the firm
d. submitted to outside legal counsel.
20. Engaging in or supporting an activity that would discredit the profession would
relate to which part of the IMA Code of Conduct?
a. competence c. integrity
b. independence d. credibility
Exercise 1-4 (Identification)
Instruction: For each item given below, write T if it is a function of the Treasurer; write
C if it is a function of the Controller.
I . Prepares the master budget and supervise accounting and auditing work.
2. Primarily responsible for obtaining investment capital.
3. Generates income tax returns and financial statements required by regulators.

4. Obtains loan and other credit lines from outside sources.
5. Basically acts as a cashier.
6. Maintains relationships with bankers and vendors.
7. Has the authority to utilize the surplus cash of the company whenever there is
any type of short term beneficial investments.
8. Acts as the planning director.

9. Oversees all financial transactions.
10. Signs checks (with a second signatory from the Board or staff).
Case Study A: Incorrect Declaration of Income
You are a sole practitioner who used to provide a range of accountancy services for a
small company. The previous external accountant died a month ago and you are hired
by the company to certify the accuracy of the financial statements for renewal of
business permit. The company operates a total of 20 branches with 120 employees.
You have been informed by the company's accountant that the company maintains
two (2) sets of books, one for internal use and the other one for BIR reporting. This had
been practiced since the business started 25 years ago. As a result, the company paid
lower income tax to the BIR.
There is a possibility that the company's funds will not suffice to pay whatever is due
to the government. In addition, it will result to job losses if the BIR Assessment will be
conducted and the correct amount shall be paid. You have discussed this with the Chief
Operating Officer (COO) but he expressed not to disclose the misdeclaration of the
Taxable Income. He also mentioned that they have contacts inside the BIR who
receives monthly allowance to facilitate all statutory requirements and future BIR
assessments of the company.
Based on the case facts mentioned above, what ethical standards have been violated
by the company, the BIR and the accounting practitioners? Explain and identify the
alternative courses of action for the affected stakeholders.
Case Study B: Taking Orders

My manager has asked me to deal with a task in relation to a contract in a way that I
am uncomfortable with. Carrying out the task in this way seems wrong to me and I
believe the approach being suggested by my manager may even be illegal in some of
the jurisdictions in which we do business. I have been thinking about talking to a senior
manager in another department for advice, but I'm not sure if I should. I feel as though
I should tell someone who can look into this, but I'm afraid that my line manager will
make my job difficult for me and possibly take me off the contract if they find out I've
spoken to someone else. What should I do?
CHAPTER TWO:
After studying this chapter. you will be able to:
Explain how variable costing differs
from absorption costing and compute unit product costs under each method.
ABSORPTION variable costing and absorption costing. Prepare income statements using both
o Analyse and reconcile variable costing and absorption costing net operating income and explain the resulting
differential profit or
loss.
COSTING vs o Understand the advantages and

disadvantages of both variable and absorption costing.
Identify. describe and apply throughput
DIRECT COSTING costina_
Cebu Pacific Air
Cebu Pacific Air entered the aviation industry on March

1996 and pioneered the "low fare, great value" strategy.
Cebu Pacific is one of the key subsidiaries of JG Summit
founded by John Gokongwei Jr, who was bestowed with an
honorary doctorate in Business and Enterprise Development and was a recipient of a Lifetime
Achievement Award from the University of San Carlos.
Over the next five years, the airline company is not expecting to add any flights at Manila due to slot
constraints but aiming to grow the average seat capacity per departure from 195 seats to 280 seats.
Increasing density is a strategy of Cebu Pacific, to lower unit costs in order to maintain very low fare in
a price sensitive market while maximizing the slots at its main hub.
In order to achieve this, the company will stop operating turboprops at Manila and will double the size
of its wide body fleet and transition most of its Manila-based narrow body flights from A320s to A321s.
The airline group's overall seat capacity has grown marginally in the last three and half years as it has
waited for the delivery of new generation aircraft.
Source: https://centreforaviation.com/anaIysis/reports/cebu-pacific-air-upgauging-drives40-growth-at-congested-manila-
485423
Product Costs vs. Period Costs
All production and non-production costs can be classified as either product costs or
period costs. Product cost is a cost attributable or directly associated with the product
as it is produced. Such costs are involved in the purchase of goods or manufacture of
products. They are included in inventory valuation that is why it is also known as
inventoriable costs. It is considered as costs of production and such product costs are
assigned to Work in process as production occurs which will be subsequently
transferred to Finished Goods as the products are completed. Once the product is sold,
the product costs are recognized as an expense (as it is charged to Cost of Goods Sold)
and matched with the related Sales for the said period. At the point of sale, the costs
are released from inventory and treated as expenses (typically called CCS).
It diminishes current income by that portion identified with the sales volume only, the
balance of which is deferred to the next accounting period as part of ending inventory.
In contrast, period costs are not assigned to the product but are recognized as expense
in the period in which it is incurred.
In other words, period cost is not related to production as it cannot be assigned to the
product but rather charged to the period in which they arise. All non-production costs
such as General and Administrative Expenses as well as Selling Expenses are period
costs. These costs are matched against revenues on a time period basis. It does not
form part of the cost of inventory and it diminishes income for the current period by its
full amount.
In general, the variable manufacturing cost is considered as product cost because they
change with the change in activity level. Conversely, the fixed cost is regarded as period
costs because they remain unchanged regardless of what activity level the company
operates. However, if you consider the type of product costing approach used by the
company, the breakdown of total fixed costs and expenses will vary. Under AC, the fixed
manufacturing cost or the fixed factory overhead is part of the costs of production
chargeable to the product being produced.
Hence, its period costs consist only of all the Operating Expenses or commercial
expenses. In short term decisions, period costs are not relevant as the amount will not
change regardless of what option or alternative you are going to choose.
Under DC, the total fixed costs and expenses include the fixed factory overhead or the
fixed manufacturing cost, therefore treated as period cost together with all Operating
Expenses. Shown in Figure I below is the composition of unit production cost under the
two (2) alternative product costing approaches.
ABSORPTION PRODUCT COSTS

COSTING
D
M DL VFO FFO VSAE FSAE
DIRECT PRODUCT COSTS
COSTING
Figure I . Breakdown of product costs and period costs under absorption costing and
variable costing
The cost assigned to unsold units or ending inventory as well as the cost assigned to
Cost of Goods Sold (CCS) will vary depending on what unit production cost is applied.
The composition of such unit production cost (UPC) will tell you whether the company
is using AC or DC.
Case # 1 : The following data were taken from the records of Hershe Inc. in 2019:
Beqinninq Endinq
Finished goods inventory I , 100 units 2,200
Cost data per unit: units
Direct material p 20 p 20
Direct labor 25 25
Factory Overhead:
Variable 15 15
Fixed 12 10
p 72 p 70
The production volume in 2018 was greater by 2,000 units compared to the 10,000
units produced in 2019. Selling price per unit is PI 00. Variable Selling and
Administrative Expenses (VSAE) is P8 per unit sold while Fixed Selling and
Administrative Expenses (FSAE) is P90,OOO.
Based on the data presented in Case ,
For the Year 2018 For the Year 2019
UPC under DM P20 + DL P25 + VFO P15 + DM P20 + DL P25 + VFO P15 +
AC FFO FFO
12
= P72 = p 70
UPC under DM P20+ DL P25 + VFO P15 DM P20 + DL P25 + VFO P15
DC = P60 = P60
As you can see in Case #1, the difference in Unit Production Cost (UPC) between AC and
DC is found in the cost element Fixed Factory Overhead (FFO) of P 12 per unit in 2018
and PIO per unit in 2019. That also explains why the UPC under AC is greater than the
UPC under DC due to the inclusion of FFO in its production cost. The UPC under DC of
P60 per unit is also called Variable Manufacturing Cost (VMC) per unit or Variable
Production Cost per unit.
Total
Period Costs VSAE P87,200 + FSAE P90,ooo ÉFO
VSAE P87,200 p
in 2018 144,000
Total P 177,200 321 ,200

Period Costs VSAE pn ,200 + FSAE FSAE90,OOO IFFO
VSAE ,200
in 2019 P90,OOO PIOO,OOO
161 00 261 200
The total FFO is computed based on normal capacity. If normal capacity is not explicitly
stated in the problem, then assume that it is equal to the actual production capacity
which in Case #1 is equal to 12,000 units in 2018 and 10,000 units in 2019. You will
notice that FFO is a product cost under AC while under DC, FFO is a period cost. So the
treatment or the classification of FFO is the key difference between AC and DC. At this
point, you can make a comparison chart wherein you indicate the basis for comparison
between product cost and period cost.
Comparison Between AC and DC

As service or merchandising companies have no fixed manufacturing costs, these
companies do not make choices between AC and DC. Advocates of Absorption Costing
(AC) believe that all manufacturing costs whether fixed or variable are essential to the
production process and should not be ignored in determining product costs. AC is the
only generally accepted method for external reporting and for preparing Income Tax
Returns (ITRs). Most managers would prefer to use AC because their performance in
any given reporting period, at least in the short run, is influenced by the volume of
production scheduled near the end of a period. In AC, inventories include both variable
factory overhead (VFO) and fixed factory overhead (FFO). Due to the treatment of FFO,
cost of inventory under DC is less than the cost of inventory under AC.
As early as 1908, there were firms using the alternative product costing approach called
Direct Costing (DC) which is also known as variable costing or marginal costing. The term
Direct Costing is a misnomer for variable costing because variable costing does not
include all direct costs as product costs. Only variable direct manufacturing costs are
included. Any fixed direct manufacturing costs, and any direct nonmanufacturing costs,
(either variable or fixed) are excluded from product costs. Variable costing includes as
product costs not only direct manufacturing costs but also some indirect costs (variable
indirect manufacturing costs).
The essential difference between AC and DC centers on TIMING (that is, when to
recognize FFO as an expense) which is at the time the finished units are sold (under AC)
or the proper timing of the release of FFO as period costs which is at the time of
incurrence (under DC). In terms of cost segregation, DC segregates all costs
(manufacturing, selling and administrative) into fixed and variable items. In other
words, DC requires the classification of costs and expenses as either variable or fixed.
This segregation is seldom found in AC. Since variable costs have a linear relationship
to output within the defined relevant range of production, they are equal to marginal
costs.
DC is usually limited to internal use by company's management. Advocates of DC argue

that fixed factory overhead is incurred in order to have the capacity to produce output
in a given period. Such costs are incurred whether or not the capacity is actually used
to make the output. The costs have no future service potential since incurring them in
the current period does not remove the necessity to incur them in the future periods.
Thus, fixed factory overhead should be charged against the period and not included in
product costs.
The merits of DC can be stated in terms of the relevance of the data provided by its
application. Some managers believe that DC provides more understandable data about
costs, volume, revenues and profits to those who do not have formal training in
accounting. Others also believe that DC helps management in their planning function
because it shows a clearer picture of how changes in production volume affects costs
and income. Product costs under AC include all variable costs and fixed manufacturing
costs which are matched with the Sales in the period in which the products are sold. DC
however, matches only the variable manufacturing costs at the time of sale while the
fixed manufacturing costs were reported as period costs at the time it was incurred.
Net Income under DC may differ from Net Income under AC because of variations
between production and sales volume. Over an extended period of time, the NI
reported by both costing methods will tend to be the same. The reason is that over the
long run, sales cannot continuously exceed production, nor can production
continuously exceed sales. The shorter the time period, the more that the NI will tend
to differ.
Arquments for the Use of DC:

DC reports are simpler and easier to understand.
2. Data needed for breakeven and CVP analysis are readily available.
3. Eliminates the problem involved in allocating fixed costs.
4. DC is more compatible with the standard cost accounting system.
5. DC reports provide useful information for pricing decisions and other decision
making problems encountered by management.
Arquments Aqainst DC:

1 . Difficulty in segregating the fixed and variable components of a mixed cost.
2. Violates the matching principle since DC excludes FFO from product costs and
charges the same to period costs regardless of production and sales.
3. With DC, inventory costs and other related accounts such as working capital, current
ratio, and acid test ratio are understated because of the exclusion of FFO in its
product costs.
When companies employ JIT, problems with NI under AC are either eliminated or
become insignificant. The erratic movement of NI under AC & the difference in NI
between AC & DC arise because of changing inventory level. Under JIT, goods are
produced strictly to customers' orders, so inventories are largely eliminated. There is
little opportunity for FFO to be shifted between periods under AC. Thus, NI will be
essentially the same whether AC or DC is used, and the erratic movement in NI under
AC will be largely eliminated. Inasmuch as DC is used in short-range planning, it
encourages a shortsighted approach to profit planning.
DC is also criticized because no fixed manufacturing cost or fixed factory overhead is

included in Work in process or Finished Goods Inventory account. Advocates of AC
argued that both fixed and variable costs are incurred in manufacturing products.
Because the inventory amounts do not reflect the total cost of production, they do not
present a realistic inventory valuation on the statement of financial position.
Adjustments can be made to the inventory amounts to reflect absorption costs on
published financial reports while retaining the benefits of direct costing for internal
decision-making purposes.
In 2018, the unit production cost (UPC) under DC was P60 and P72 as UPC under AC. If
P66,000 was the 2018 ending inventory under DC, the equivalent cost of 2018 ending
inventory under AC will be computed as follows:
Since AC is 120% of direct costing (P 72 divided by P60), so ending inventory would

be adjusted as follows:
Ending inventory under DC P66,OOO x 120% = P 79,200 as ending inventory under AC
Or
P 66 000 = 1,100 units unsold x UPC under AC P72

UPC under DC P60
= P 79,200 as ending inventory under AC
Including or excluding fixed costs from inventories and from CCS causes Gross Profit (GP)
or Gross Margin to differ from Gross Contribution Margin (CM). Gross CM (Sales less
Variable Manufacturing Costs) is considerably greater than GP. In the Theory of
Constraints (TOC) approach, direct labor is generally considered a fixed cost for the
following reasons:
I . Even though DL workers may be paid on an hourly basis, many companies have a
commitment (sometimes enforced in labor contracts or by law) to guarantee workers
a minimum number of paid hours;
2. In TOC companies, DL is not usually the constraint (it's either machine constraint or
policy constraint);
3. TOC emphasizes continuous improvement to maintain competitiveness. Without
the committed and enthusiastic employees, sustained continuous improvement is
virtually impossible. Managers involved in TOC are extremely reluctant to lay off
employees.
TOC companies believe that direct labor is much more like a committed fixed cost
than variable cost. Hence, in the modified form of Variable Costing used in TOC
companies, DL is not included as part of product costs.
Effect of Changes in Production on Net Income
Net Income under DC is not affected by changes in production. Using DC, reported NI
moves in the same direction as Sales. Net Income under AC is affected by changes in
production. NI will increase as production increases and decrease as production
decreases. As inventories grow, FFO is deferred in inventories but as inventories shrink,
FFO is released to the income statement. These changes in NI are a major drawback of
AC since a company can increase its reported NI by simply increasing production.
Fluctuations in NI can be due to changes in inventories rather than to changes in sales.
EFFECT ON NET INCOME
Relationship between Relationship between

Production and Sales for AC Net Income (ACNI)
the Period and VC Net Income
Effect on Inventories (VACNI)
No change in inventories
FFO expensed under AC is

equal to the FFO expensed
under DC ACNI = VACNI
Inventory increases;
Net income is higher under

AC since FFO is deferred in
inventory under AC as
If p > S inventories increase. ACNI > VACNI
If P < s Inventory decreases;
Net income is lower under

AC since FFO is released from
inventory under AC as
inventories decrease. ACNI < VACNI
Profit (Loss) Reconciliation
Differential profit (loss) is the difference in profit (loss) between Absorption Costing (AC)
and Direct Costing (DC). The profit or loss shown by one product costing approach may
not agree with that shown by the alternative product costing approach used by a
manufacturing company. Therefore, it becomes necessary that periodically the profit or
loss shown by AC and DC be reconciled.
Before showing the marginal income statement for Case #1, let us first determine the
sales volume for each year as follows:
Units in FGI beginning ........................................... 1 ,100

units
+ Units currently produced . ......IO 000 units
Units available for sale 12 000 units
. .....................I I,IOO units 12,000 units
- Units in FGI end ... .... (2,200 units) 1 , 100 units
2019 2018
Units sold . 8,900 units 10,900 units
If ending inventory (El) is greater than beginning inventory (BI), then there is increase in
inventory level. Such increase in inventory level shall be multiplied by the FFO per unit
in order to get the differential profit which is to be added to the Profit computed under
DC or Variable Costing in order to get the equivalent profit under AC. However, if El is
less than BI, then there is decrease in inventory level which is then multiplied by the
FFO per unit in order to get the differential profit which is to be deducted from the Profit
computed under DC or Variable Costing.
The difference between ending inventory in units and beginning inventory in units
represents the increase (decrease) in inventory level. Such change in inventory level can
also be computed by the difference between sales volume and production volume. This
change in inventory level will be multiplied by the FFO per unit to get the differential
profit.
Let us use the data in Case #1 to prepare the marginal income statement or the income
statement under DC or Variable Costing used for internal reporting and illustrated as
follows:
Hershe Inc.
Income Statement — Variable Costing
For the year ended December 31 , 2018
Sales (P 100 per unit x 10,900 units sold) .

Less Variable CGS ( P60 per unit x 10,900 units sold). ..... .... ..... .. 654 000
Contribution Margin from Manufacturing or Gross CM P 436,000
Less VSAE ( P8 per unit x 10,900 units sold).............................. 87 200
Final Contribution Margin ............................................... P
348,800
Less Total Fixed Costs and Expenses:
Fixed Factory Overhead (P 12 per unit x 12,000 units) —„ PI 44,000
Fixed Selling and Administrative Expenses .90 000234 000
Profit under DC or Variable Costing . p 1 14,800
The short-cut way of computing the Variable CCS is shown above. However, if you opt
to show the detailed way of presenting it, it would appear as follows:
Finished Goods Inventory beginning
+ Current Production Costs 12,000 units x P60 = 720 000
Variable Cost of Goods Available for Sale P720,000
- Finished Goods Inventory end 1,100 units x P60 = 66,000
Variable Cost of Goods Sold P654,ooo

2018 was the first year of operations, so there was no beginning inventory. The
differential profit in 2018 is PI 3,200 which is the amount of FFO deferred in inventory.
The 2018 profit under absorption costing is computed in the form of a reconciliation
report:
Profit using Direct Costing or Variable Costing p 1 14,800
Add: FFO in Ending Inventory P 12 x 1 ,100 units unsold = 13,200

Less: FFO in Beginning Inventory
Profit using Absorption Costing P 128,000
The income statement under AC categorizes costs and expenses by function:

manufacturing versus non-manufacturing. All selling and administrative expenses (fixed
and variable) are reported as period costs. The profit under AC and DC can be reconciled
by determining how much FFO was deferred in, or released from, inventories during the
period. For manufacturing firms that use Lean Production, the production
volume tends to equal the sales volume because products are produced in response
to customers' orders, thereby eliminating work in process inventories and finished
goods inventories.
Hershe Inc.
Income Statement — Absorption Costing
Sales (PI 00 per unit x 10,900 units sold)

Less Cost of Goods Sold (P72 per unit x 10,900 units sold)* 784 800
Gross Profit or Gross Margin P 305,200
Less Operating Expenses:
Variable Selling and Administrative Expenses . . P 87,200
Fixed Selling and Administrative Expenses ........ . . 90,000 177,200 Profit under
AC P 128,000
The 2018 Cost of Goods Sold was computed using the short-cut way wherein the UPC
under AC amounting to P 72 was multiplied by its sales volume. If instead you use the
detailed format of computing Cost of Goods Sold, then it shall be presented as follows:
Finished Goods Inventory beginning

+ Current Production Costs 12,000 units x P72 = 864 000 Total
Goods Available for Sale or TGAS P864,OOO
- Finished Goods Inventory end 1,100 units x P72 = 79 200
Cost of Goods Sold P784,800
To get the 2018 equivalent profit using Direct Costing or Variable Costing approach,
follow this format:
2018 Profit under Absorption Costing . P 128,000

Add: FFO in Beginning Inventory
Less: FFO in Ending Inventory P 12 x I , 100 units unsold = ( 13.200)
2018 Profit under Direct Costing or Variable Costing PI 14,800
Production is greater than Sales in both 2018 and 2019, hence inventories increase. In
2018, production exceeds sales by 1,100 units x FFO per unit @ P 12 = Differential profit
of PI 3,200. In 2019, production exceeds sales by 1,100 units. In both years, ending
inventory is greater than beginning inventory by 1 ,100 units. That is why the profit
under AC is greater than the profit under DC for both years,
Hershe Inc.
Sales (P 100 per unit x 8,900 units sold) P 890,000

Less Total Variable Costs and Expenses:
Variable CGS ( P60 per unit x 8,900 units sold)...................P534,OOO
VSAE (P8 per unit x 8,900 units sold)................... 71 200 605.200 Final
Contribution Margin ..................................... ......P 284,800
Fixed Factory Overhead (PIO per unit x 10,000 units) .......... moo,ooo
Fixed Selling and Administrative Expenses
90000 190 000 Profit under DC or Variable Costing p
94,800
OR
Hershe Inc.
Sales (PI 00 per unit x 8,900 units sold*) . P

890,000 Less Variable CCS ( P60 per unit x 8,900 units sold)................... ..............
534 000 Contribution Margin from Manufacturing or Gross CM P 356,000
Less VSAE . 71 200
Final Contribution Margin P 284,800
Fixed Factory Overhead (PIO per unit x 10,000 units) . .. PI OO,OOO
Fixed Selling and Administrative Expenses
......................... 90 000 190 000 Profit under DC or Variable Costing .
p 94,800
The Variable Cost of Goods Sold is computed based on the Unit Production Cost of P60
multiplied by the sales volume. This can also be calculated in detail as follows:
Finished Goods Inventory beginning I , 100 units x P60 = P 66,000
+ Current Production Costs 10,000 units x P60 = 600.000
Variable Cost of Goods Available for Sale P666,OOO
- Finished Goods Inventory end 2,200 units x P60 = 1 32 000
Variable Cost of Goods Sold P534,OOO
If you want to know the resulting profit using the alternative product costing approach
which is absorption costing, then use this reconciliation method:
Profit using Direct Costing or Variable Costing p 94,800
Add: FFO in Ending Inventory PIO x 2,200 units unsold = 22,000
Less: FFO in Beginning Inventory PI 2 x 1,100 units = (13,200) 8 800
Profit using Absorption Costing PI 03,600
The differential profit is P8,800 which is the difference in Profit between AC and DC. So
even without preparing the income statement under AC, the bottomline figure will still
be obtained using the reconciliation method. Let us check this amount by preparing
the income statement using AC:
Hershe Inc.
Income Statement — Absorption Costing
Sales (PI 00 per unit x 8,900 units sold* ) . .............................. P

890,000
Less Cost of Goods Sold:
Finished Goods Inventory beginning I , 100 units x P 72 =P 79,200
+ Current Production Costs 10,000 units x P70 = 700,000 Total
Goods Available for Sale P779,200
- Finished Goods Inventory end 2,200 units x P70= 154000 625 200 Gross
Profit or Gross Margin P 264,800
Less Operating Expenses:
Variable Selling and Administrative Expenses ... ... ...... P 71 ,200
Fixed Selling and Administrative Expenses .................. 90,000 161,200
Profit under AC . P 103,600
The short-cut way of computing Cost of Goods Sold is no longer applicable in 2019
because the UPC under AC at the beginning of the year is not the same as the UPC under
AC at the end of the year. In other words, you can use the short-cut only when the UPC
is the same all throughout the year.
To get the equivalent profit using the alternative product costing approach, follow this
format:
Profit under Absorption Costing PI 03,600
13,200
Add: FFO in Beginning Inventory PI 2 x 1 ,100 units
Less: FFO in Ending Inventory PIO x 2,200 units unsold = (22,000)
p 94,800
Profit under Direct Costing or Variable Costing
Approaches used to reduce the negative aspects associated with using AC
include:
1 . Change the accounting system
• Adopt either variable or throughput costing, both of which reduce the incentives
of managers to build for inventory.
• Adopt an inventory holding charges for managers who tie up funds in inventory.
2. Extend the time period used to evaluate performance. By evaluating performance
over a longer time period (like 3 to 5 years), the incentive to take short-run actions
that reduce long-term income is lessened.
3. Include non-financial as well as financial variables in the measures used to evaluate
performance.
The company may use either theoretical capacity or normal capacity to compute the
budgeted fixed overhead rate. The theoretical capacity and practical capacity
denominator-level concepts emphasize what a plant can supply. The normal utilization
and master budget utilization concepts emphasize what customers demand for
products produced by a plant. Theoretical capacity is based on the production of output
at maximum efficiency or at 100% level. Practical capacity reduces theoretical capacity
for unavoidable operating interruptions such as scheduled maintenance, shutdowns for
holidays and other days, and so on.
The smaller the denominator, the higher is the overhead costs capitalized for inventory
units. Thus, if the plant manager wishes to adjust plant operating income by building
inventory, master budget utilization or normal utilization would be preferred.
Conversion of Income Statement under AC to Variable Costing
I . Upon conversion:
a) Determine the FFO per unit of the base period and deduct this from the unit cost
of the beginning inventory.
b) Compute the FFO per unit for the current period and deduct it from the unit cost
of ending inventory.
c) Determine the fixed portion of Operating Expenses.
2. If the income statement to be converted to DC includes variances due to inclusion of
factory overhead based on normal capacity, they should be treated as adjustments
to factory overhead with the Spending Variance generally identified with Variable
Factory Overhead (VFO), the Volume Variance with the Fixed Factory Overhead
(FFO).
Case #2:
Lexi Manufacturing Co. asked you to convert the income statement given below to
conform with the contribution margin approach or direct costing method:
Lexi Manufacturing Co.
Income Statement
Sales 30,000 x PI 5 P
Less Cost of Goods Sold: 450,000
Inventory, January I 5,000 x P8 = P 40,000
Add Current Production Cost 31,500 x PIO = 315,000

Total Goods Available for
P355,OOO
Sale
Less Inventory, December 31 6,500 x 65 000
000
Gross Profit or Gross Margin P1
60,000
Less Operating Expenses ........................... 1 10 000
Net Income P 50,000
An analysis of costs and expenses showed the following:

The 2019 production cost per unit consists of:
Direct materials . P 3.00
Direct labor .2.00
Variable factory overhead — 3.00
Fixed factory overhead . 2.00
PI o.oo
Fixed factory overhead in 2018 was P55,OOO with production volume of 50,000
units. Operating expenses of 2019 included variable selling expenses of P3.00 per
unit.
Lexi Manufacturing Co.
Income Statement — Direct Costing
Sales 30,000 x P15 P 450,000

Less Cost of Goods Sold:
Inventory, January I 5,000 x P6.90 = P 34,500
Add Current Production Cost 31 ,500 xP8.OO = 252 000
Variable Cost of Goods Available for Sale P286,500
Less Inventory, December 31 6,500 x P8.OO 52 000 234
500
Gross Contribution Margin or CM from Manufacturing P 215,500
Less Variable Operating Expenses 30,000 x P3.OO = 90 000
Final Contribution Margin P 125,500

Fixed Factory Overhead . . . .. . . . . ... . . . ... . . . P 63,OOO
Fixed Operating Expenses ................................................ 20 00083 000

Net Income under Direct Costing P 42,500
Reconciliation of Net Income:

Net Income under AC P 50,000
Add FFO in Beginning Inventory 5,000 units x PI .10 = 5,500
Less FFO in Ending Inventory 6,500 units x P2.OO = (13.000)
Net Income under Direct Costing P 42,500
Throughput Accounting (TA)
Throughput Accounting (TA) is a manaqement accountinq technique used as the
performance measure in the Theory of Constraints (TOC). It focuses on capacity
utilization and on generating more throughput. It is an important development in
modern accounting proposed by Elivahu M. Goldratt as an alternative to traditional cost
accounting that allows managers to understand the contribution of constrained
resources to the company's overall profitability. The fundamental assumption of TOC is
that the constraint (either internal or external to the company) limits the performance
of any systems. TOC suggests the managers to focus on how to manage those
constraints in improving the overall performance of the company.
It assumes that there is always one bottleneck operation in a production process that
commands the speed with which products or services can be completed. This operation
becomes the defining issue in determining what products should be manufactured first,
since this in turn results in varying levels of profitability.
Throughput costing treats only Direct Materials(DM) as true variable cost and other
remaining costs as period costs to be charged in the period in which they are incurred.
Only DM costs are inventoriable costs. Direct labor costs, factory overhead (both
variable and fixed) and all operating expenses are period costs. Throughput contribution
or throughput margin is equal to revenue minus all variable direct materials cost of
goods sold. It is not used for external reporting because it gives significant different net
income figures than in AC. Hence, it has relevance only for internal uses of management.
Throughput Costing (also known as super-variable costing) puts greater emphasis on

sales as the source of Operating Profit than either absorption or variable costing. It is
not based on standard costing nor Activity Based Costing (ABC). Throughput costing
puts a penalty on producing without a corresponding sale in the same period. A
manager using throughput costing cannot increase operating profit by building for
inventory as what is possible under AC.
Throughput costing results in a lower cost of inventory compared to variable or

absorption costing. Supporters of throughput costing claim that it provides less
incentive to produce for inventory than AC or DC since inventory value is very low.
The following table illustrates three alternative rules for determining which costs are
capitalized. All three are used in managerial accounting practice. The 3 methods are AC,
VC, and TC (throughput costing). The comparison of the absorption, variable, and
throughput costing methods is summarized in the table below:
Absorption Costing Variable Costing Throughput Costing
External Reporting GAAP Not GAAp Not GAAp
Internal Reporting Used to save costs Used to evaluate Used for short-term
performance and capacity decisions
for decision
making
Inventory costs Direct materials Direct materials Direct materials
Direct labor Direct labor
Variable overhead Variable overhead
Fixed overhead Variable
SG&A
expenses*
Period costs SG&A expenses Fixed overhead Direct labor
(expensed when
Fixed SG&A Variable overhead
incurred)
expenses Fixed overhead
SG&A expenses
As the table indicates, non-manufacturing costs are never capitalized as part of
inventory cost.
For internal reporting purposes, survey data suggests that approximately half of
manufacturing companies use AC and approximately half use DC. Throughput costing is
a relatively recent phenomenon, and does not seem to be used extensively yet.
Problem I - Rinseman Statues produces a specialty statue item. The following

information has been provided:
Actual sales 300,000 units
Budgeted production 320,000 units
Selling price P34.00 per unit
Direct materials costs P9.OO per unit
Direct labor costs P3.OO per unit

Fixed manufacturing costs P5.OO per unit
Variable manufacturing OH P4.OO per unit

Variable administrative costs P2.00 per unit
a. How much is the cost per statue if absorption costing is used?
++ + P4 = .00
b. How much is the cost per statue if "super-variable costing" is used?

Equal to direct materials = P9,OO
c. What is the total throughput contribution or throughput margin?

300,000 (P34 - P9) =
Problem 2. Tick Tock produces and sells a mantel clock for P80 per unit. In 2019, 42,000
clocks were produced and 41 ,OOO were sold. Beginning inventory consisted of 1,600
clocks. Other information for the year includes:
Direct materials P30.OO per unit
Direct manufacturing labor P2.00 per unit

Variable OH costs P3.OO per unit
Sales commissions P5.OO per part
Fixed manufacturing costs P25.OO per unit

Administrative expenses, all fixed PI 5.00 per unit
a. What is the inventoriable cost using throughput costing?
P30.OO * (l ,600 + 42,000 - 41 ,000) = P78,OOO
b. What is the total throughput contribution?
(P80 - P30) * 41 ,OOO =
Exercise 2-1. Modified True or False. Use the following choices for your answers.
a. Both statements are true c. Only 2nd statement is true
b.Only 1st statement is true
d.Both statements are false
statement: Under absorption costing, factory overhead is ignored in the
computation of unit cost.
2nd statement: The wages paid to supervisors is an example of direct labor.
2. 1st statement: A product cost should not appear in the income statement until the
period in which the product sold.
2nd statement: Variable costing is more widely used than the full costing in
published financial statement.
3. I st statement: Under variable costing, all fixed costs are treated as a period cost. 2
n
d statement: Factory overhead includes all manufacturing costs except labor and
raw materials.
4. 1st statement: Under absorption costing, fixed factory overhead is considered as

period costs.
2nd statement: When variable costing is used all fixed manufacturing costs are
treated as period cost.
5. Ft statement: Product cost associated with goods in process and unsold inventories
of finished goods appear on the balance sheet as current assets until the goods are
sold.
2nd statement: All cost and expenses incurred by a manufacturing company are
considered product cost rather than period cost.
6. 1st statement: The costs that are treated as product costs under variable costing are
all variable costs.
2 nd statement: Direct costing is not in accordance with GAAP because fixed
manufacturing costs are assumed to be period costs.
7. Ft statement: In variable costing, fixed factory overhead forms part of the inventory
value.
2 nd statement: Under the direct costing method, the contribution margin
discloses the excess of revenues over fixed costs.
8. Ft statement: A concept of costing under which costs are classified as fixed or

variable is called direct costing.
2nd statement: The basic accounting principle of matching revenues, costs and
expenses is better accomplished by the use of direct costing method.
9. 1 st statement: Often referred to as absorption costing, it is a concept wherein only
the variable manufacturing costs are assigned to the product and fixed
manufacturing costs are written off as period costs.
2nd statement: Fixed factory overhead is necessary for the production of a product,
is an argument against the use of variable costing.
10. Ft statement: For a company that uses direct costing, the cost of a unit of product
changes because of changes in the number of units manufactured.
2nd statement: In an income statement prepared as an internal report using the
variable costing method, the term gross margin is used.
Exercise 2-2 (Multiple Choice). Instruction: Encircle the letter of your chosen best
answer.
An allocated portion of fixed factory overhead is included in work in process

inventory under
a. Absorption costing — No; Direct costing — No
b. Absorption costing — Yes; direct costing - No
c. Absorption costing — No; direct costing — Yes
d. Absorption costing — Yes; direct costing — Yes
2 The basic assumption made in a direct costing system with respect to fixed costs
is that fixed costs are
a. A sunk cost c. A product cost
b. Fixed as to the total cost d. A period cost
3. A basic tenet of direct costing is that period costs should be currently expensed.
What is the basic rationale behind this procedure?
a. Period costs are uncontrollable and should not be charged to a specific
product
b. Period costs are generally immaterial in amount and the cost of assigning
the amounts to a specific products outweigh the benefits
c. Allocation of period costs is arbitrary at best and could lead to erroneous
decisions by management
d. Period costs will occur whether or not production occurs and so it is
improper to allocate these costs to production and defer a current cost of
doing business.
4. These are costs that will change in per unit basis when production volume
increases or decreases within the relevant range.
a. Variable cost c. Fixed costs
b. Relevant costs d. Period Costs
5. Which of the following is least likely to be classified as fixed costs?

a. Factory rent c. Direct materials
b. Plant manager salary d. Depreciation on factory building
6. Which of the following is more descriptive term of the type of cost accounting
called "direct costing"
a. Out of pocket costing c. Relevant Costing
b. Variable Costing d. Prime Costing
7. Why is direct costing not in accordance with GAAP?
a. Fixed manufacturing costs are assumed to be period costs
b. Direct costing procedures are not well known in industry
c. Net earnings are always overstated when using direct costing procedures
d. Direct costing ignores the concept of lower of cost or market when valuing
inventory.
8. Gross Margin is to absorption costing as is to variable costing

a. Gross profit c. Income
b. Contribution margin d. Territory margin
9. When monthly production is constant and sales volume is less than production,
income determined with variable costing procedures will
a. Always be greater than income determined using absorption costing
b. Always be less than income determine using absorption costing
c. Be equal to income determined using absorption costing
d. Be equal to contribution margin per unit times unit sold
10. Inventory values calculated using variable costing as opposed to

absorption costing will generally be
a. Equal c. greater
b. Less d. twice as much
1 1 . Which of the following statements are true?
a. Expenses are not usually separated into variable and fixed elements in
externally reported income statements.
b. Even if there is no change in units sold, selling price, or cost structure, a
company can increase its absorption costing net operating income from
one year to the next just by producing more units.
c. When finished goods inventory decreases during a period, a
manufacturing company's absorption costing net operating income for
that period will usually be greater than variable costing net operating
income.
d. Both A and B
12. The gross margin for a manufacturing company is the excess of sales over
a. Costs of goods sold, excluding fixed manufacturing overhead
b. All variable costs, including variable selling and admin expenses
c. Costs of goods sold, including fixed manufacturing overhead
d. Variable costs, excluding variable selling and admin expenses.
13. Which of the following is correct about the concept of variable costing?
a. The variable costing net operating income for each period can always be
computed by multiplying the number of units sold by the gross income
per unit and then subtracting the total operating expenses.
b. If unit sold is greater than the units produced for the current year, the
income under absorption costing is greater than the variable costing.
c. Under variable costing if all other things the same, when sales go up,
income go up and the other way around. The number of units produced
does not affect net operating income.
d. Under variable costing, a product cost is composed of direct material,
direct labor and factory overhead.
e. Variable costing is sometimes referred to full cost method.
14. Parker Products Inc., a manufacturer, reported P 123 million in sales and a loss
of P 18 million in its annual report to shareholders. According to a CVP analysis
prepared for management, the company's break-even point is PI 15 million in
sales. Assuming that the CVP analysis is correct, we can conclude that the
income statement prepared
a. Under absorption costing there is a net loss while under variable costing
there is a net income.
b. Under absorption costing there is a net loss while under variable costing
there is also a net loss.
c. Under absorption costing there is a net income while under variable
costing there is also a net income
d. Under absorption costing there is a net income while under variable
costing there is a net loss.
15. Which of the following statement is true for a firm that uses direct costing?
a. The cost of a unit product changes because of changes in number of units
manufactured.
b. Product costs include direct administrative costs
c. Profit fluctuate with sales
d. An idle facility variation is calculated by a direct cost system.
16. Which of the following inventory costing methods shown below is LEAST likely
to cause undesirable incentives for managers to build up finished goods
inventory?
a. absorption costing c. throughput costing
b. variable costing d. direct costing
17. Throughput costing is also

called
a. absorption costing c. mixed costing
b. super-variable costing d. direct costing
18. Advocates of throughput costing argue that
a. only direct materials are truly variable
b. direct manufacturing labor should not be accounted for
c. variable manufacturing costs are a cost of the period
d. answers a and c
19. Throughput contribution equals

a. variable costs minus fixed costs
b. revenues minus all direct labor costs
c. revenues minus all direct material cost of goods sold
d. revenues minus manufacturing overhead
20. When finished goods inventory increases, net income based on throughput
costing
a. will be less than net income based on either absorption costing or direct
costing. b. will be greater than net income based on either absorption costing
or direct costing.
c. will be greater than net income based on absorption costing but equal to
direct costing net income.
d. will be greater than net income based on direct costing but equal to
absorption costing net income.
21 . If direct material cost of goods sold is P7,500, and throughput contribution is PI
5,650, then revenues will be
a. P8,150 b. P13,150 c. P23,1 50 d. P33,150
22. Under which condition is fixed overhead released from inventory?

a. Production = Sales c. Production < Sales
b. Production > Sales d. Ending inventory > Beginning inventory.
23. A reason why absorption costing income statements are sometimes difficult for
the manager to interpret is that:
a. they omit variable expenses entirely in computing net operating income.
b. they shift portions of fixed manufacturing overhead from period to
period according to changing levels of inventories.
c. they include all fixed manufacturing overhead on the income statement
each year as a period cost.
d. they ignore inventory levels in computing income charges.
24. What will be the difference in net income between AC and DC if the number of
Work in process and Finished Goods inventories increase?
a. There will be no difference in net income
b. Net Income computed using DC will be higher.
c. The difference in net income cannot be determined from the
information given.
d. Net income computed using DC will be lower.
25. When sales are constant but the production level fluctuates, net operating
income determined by the variable costing method will:
a. fluctuate in direct proportion to changes in production level.
b. remain constant.
c. fluctuate inversely with changes in production.
d. be greater than net operating income under AC.
Exercise 2-3. (Basic Computation). Raine Company manufacturers a professional grade
vacuum cleaner and began its operation in 2019. For 2020, the company had no price,
spending, or efficiency variances and writes off production-volume variance to cost of
goods sold. Actual data for 2020 are given as follows: Units produced — 18,000: Units
sold — 18,500; Unit Selling Price — P280; Materials — P30; Manufacturing labor — P25
Manufacturing Overhead — P50; Variable Marketing and Admin Expense — P45; Fixed
Manufacturing Cost — P900,OOO; Fixed Selling and Administration Expense —
P750,OOO.
Requirements:
a. Compute the inventoriable unit cost for internal and external reporting
purposes
b. Compute the operating income for 2020 under variable and absorption
costing.
c. Provide a reconciliation in income under the two costing methods.
Exercise 2-4 (Basic Computation) CAPITANA CO. Began its operations on January I , and
produces a single product that sells for P 10 per unit. CAPITANA uses an actual cost
system. During the year, 100,000 units were produced and 80,000 units were sold.
There was no work in process inventory at December 31. Manufacturing and selling,
administrative expenses for the year were as follows:
Fixed Cost Variable Costs
Raw Materials P2.OO per unit

produced
Direct Labor PI .25 per unit
produced
Factory Overhead PI PO.75 per unit
20,000 produced
Selling and Admin P70,OOO PI .00 per unit sold
Requirements:
a. Compute the cost of finished goods inventory at December 31 under variable
costing and under absorption costing
b. Compute the net income under variable costing and under absorption costing
Exercise 2-5 (Multiple Years). Information for the year 201 6- 2018 are as follows:
2016 2017 2018
Beginning Inventory
Production 1,000 I ,OOO 1 ,ooo
Sales I ,OOO 900 1,100
Ending inventory
Costs incurred are as follows: Direct materials — PI O/unit; Direct labor—

P3.OO/unit; Variable manufacturing overhead — P3/unit; Fixed manufacturing
overhead — P8,OOO; Variable Marketing Expense — P2/unit; Fixed marketing Expense
— PI 2,000; Unit Selling Price - P50.
Requirements:
a. Compute the unit product cost under absorption costing, variable

costing and throughput costing.
b. Compute the net income under Absorption Costing, Variable
Costing and Throughput Costing for 2016- 2018
c. Prepare a reconciliation for the three methods
Exercise 2-6. (Reconciliation) Pasta Corp. manufactures a variety of products. The ff. data
pertain to the company's operations over the last 2 years;
Variable Costing Net Operating Income, last year .................. P 82,700
Variable Costing Net Operating Income, this year . . 87,800
Increase in ending inventory last year 900
Decrease in ending inventory this year .
Fixed manufacturing overhead cost per unit 2
Requirement:
Determine the absorption costing net operating income last year and this year.
Supply the necessary computation and amount to be added or deducted:
Last Year This Year
Variable Costing Net Operating Income ...................... . P 82,700 P87 ,800

Add FFO deferred in inventory under AC:
Less FFO released from inventory under AC:
Absorption Costing Net Operating Income ........................

P
Exercise 2-7 (With Variances). The president of Toblerone, Inc. has been reviewing the
income statements of the two most recent months. She is puzzled because sales rose
and profits fell in March, and she asks you, the controller, to explain.
February March
Sales (P30 per case) P 540,000 P 660,000
Standard cost of sales 270,000 330,000
Standard gross profit P 270,000 P330,OOO
Volume variance 40,000 (50,000)
Selling and administrative expenses ( 1 50 (150,000)
Income P 160,000 P
130,000
The standard fixed cost per case is P 10, based on normal capacity of 20,000 cases per
month.
Requirements:
a. Determine the production volume for each month.
b. Prepare the March income statement using variable costing.
Exercise 2-8. (With Variances) Pro-Pinoy Products presents the following data from
absorption costing income statements for the last two years:
20A 20B
Sales.............................................................................................
Cost of goods sold (at standard) ........................ 800,000 950,000
Over- or underapplied overhead ............................... 25,000 (25,000)
Marketing and general expense ............................... 500,000 550,000

Operating income ......................................................... 675,000
Required: Prepare the direct costing income statements for each year, assuming that
there were no changes in capacity between years and that the unit variable costs are
constant. (Hint: Use the high- and low-points method to determine the fixed and
variable portions of each cost element.)
Exercise 2-9. Cadbury Co. uses a standard cost system in accounting for its only product
which it sells @ P22 per unit. The standard unit cost is:
Direct materials...............
Direct 6
Variable factory overhead................................................................... 2
Fixed factory overhead (based on normal capacity of 60,000 units) .........
3 p
15
All variances are closed to Cost of Goods Sold. On October I , there were
10,000 units on hand. During October, 50,000 units were produced and 45,000
were sold. Costs incurred during October were:
Direct materials P 198,000
Direct labor 305,000
Variable factory overhead 103,000
Fixed factory overhead 186,000
Variable marketing and administrative 50,000
Fixed marketing and administrative 74,000
Required: (l) Explain whether the company uses direct or absorption costing.
(2) Prepare an income statement for October, using direct costing.
(3) Compute the operating income for October if absorption costing is used.
Exercise 2-10. K Corp. developed the following standard unit costs @ 100% of its normal
production capacity, which is 50,000 units per year:
Direct materials.......................P 3
Direct labor..... 3 Variable
factory overhead........2
Fixed factory overhead............ 3
The selling price of each unit of product is P20. Variable commercial expenses are PI per
unit sold and fixed commercial expenses total P 150,000 for the period. During the year,
49,000 units were produced and 52,000 units were sold. There are no work in process
beginning or ending inventories, and finished goods inventory is maintained at standard
cost, which has not changed from the preceding year. For the current year, there is a
net favorable variable cost variance of PI ,OOO.
Required: (1) Prepare an income statement on the absorption costing basis.

(2) Prepare an income statement on the direct costing basis.
(3) Reconcile the differential profit for the current year under AC and DC.
Exercise 2-11. Multiple Choice (Problems and Theory Questions)
During January 2018 Banay Labangon makes a single product — a handmade
straw hat for the Sinolog 2018 that it sells for P230. Its budgeted production was 20,000
units of these straw hats with costs as follows: Direct Materials — PI Direct Labor — PI
Variable Manufacturing Overhead — P400,OOO; Variable Selling and Admin Expense
— PIO/unit; Fixed Manufacturing Overhead — P 700,000 and Fixed Selling and Admin
Expense of P284,OOO.
It sold 18,000 units for the month.
6. The unit variable costs for the purpose of computing gross income, contribution
margin and throughput margin respectively, will be?
a. P205/unit; PI 70/unit and P60/unit respectively
b. PI 70/unit; PI 70/unit and PI 70/ unit respectively
c. PI 70/unit; PI 80/unit and P60/unit respectively
d. P205/unit; PI 70/unit and PI 70/ unit respectively
e. P205/unit; PI 80/unit and P60/unit respectively
7. The gross income ratio, contribution margin ratio and throughput margin ratio
respectively, will be?
a. 10.87%; 26.08% and 73.91% respectively
b. 26.08%,• 26.08% and 26.08% respectively
c. 26.08%,• 21 .74% and 73.91% respectively
d. 10.87%,• 26.08% and 26.08% respectively
10.87%,• 21 .74% and 73.91% respectively
8. How much is the cost of ending inventory under absorption costing, variable
costing and throughput costing respectively?
a. P410,OOO; P340,OOO and P120,ooo respectively
b. P340,OOO; P340,OOO and P340,OOO respectively
c. P340,OOO; P360,OOO and P120,ooo respectively
d. P410,OOO; P340,OOO and P340,OOO respectively
e. P410,OOO; P360,OOO and P340,OOO respectively
9. How much is the difference of the net income under income statement prepared
for external purposes and the supervariable costing?
a. P290,000 b. P318,000 c. P410,000 d. P70,000 e. None
10. Assuming that the number of units produced is equal to number of units sold
a. The income under absorption costing will be equal to variable costing but
higher than throughput costing
b. The income under absorption costing will be equal to variable costing but
lower than throughput costing.
c. The income under absorption costing will be equal to variable costing and
throughput costing.
d. The income under absorption costing will be equal to variable costing but
no general conclusion will be made on throughput costing as there is no
relationship existed between the three.
e. No conclusion can be made due to lack of information.
1 1. If the selling price increases by 12%, variable expense decrease by PI .40 per
unit, and the number of units sold increase by 15%. What will be the effect in net
income under direct costing approach?
a. P593,340 increase c. P651 ,300 increase e. P509,340 increase
b. P735,300 increase d. P677,340 increase
12. If the company using the contribution margin approach wanted a net income
before tax of P475,OOO with a tax rate of 30%. How much will be the net income
after tax under absorption costing?
a. pm 4,765 c. PI 53.700 e. P381 ,500
b. PI 50,336 d. P107,590
13. A manufacturing company that produces a single product has provided the
following data concerning its most recent month of operations:
Beginning Inventory Fixed SAE per month P25,900
Units produced 4,000 Direct Materials P38 / unit
Units sold 3,700 Direct Labor P51/ unit
Selling price per p 138 Variable Overhead P6/ unit

unit
Variable SAE P7 per Fixed Overhead per PI OO,OOO
unit month
What is the total period cost for the month under throughput costing?
a. P151,800 c. P379,800 e. P341 ,490
b. P362,700 d. P381 ,900
14. Roberts Company produces a single product. During the year just ended, the
company's net operating income under absorption costing was P3,OOO lower
than under variable costing. The company sold 9,000 units during the year, and
its variable costs were P9 per unit, of which P3 was variable selling expense and
P2
was direct material. If production cost is PI 1 per unit under absorption costing
every year, then how much is the net income under throughput costing?
a. P3,OOO higher than variable costing
b. P2,400 higher than absorption costing
c. P3,OOO lower than variable costing and same as the income of
absorption costing
d. P5,400 higher than absorption costing
e. PI ,200 higher than the variable costing
Johnson Realty bought a 2,000 acre island for P and divided it into
200 equal size lots:
• As the lots are sold, they are cleared at an average costs of P5,000
Storm drains and driveways are installed at an average cost of P8,OOO
per
site
• Sales commissions are 10% of selling price.

Administrative costs are P850,OOO per year
• The average selling price per lot was PI 60,000 per lot during 2015 when 50
lots were sold
During 201 6, the company bought another 2,000 acre island and developed it
exactly the same way. Lot sales in 2016 totaled 300 with an average selling price of PI
60,000. All costs were the same as in 2015.
15. The income under variable costing in 201
5:
16. The income under absorption costing in 201 6 will be:
17. A company produces a single product. Production is done only when orders are
received from customers. Thus, no inventory is kept at the end of the period.
For the last period, the following data were available: Sales — P48,OOO;
Materials — PIO,860; Labor - (90% factory; office) - P3,600;
Depreciation (80% factory, 20% office) — P3,OOO; Supervision(2/3 factory, 1/3
office) - PI,800; Salesmen's salaries commission — PI ,560; Insurance (60%
factory, 40% office) — PI ,440; Office Supplies — P900; Advertising — P840. If
the company is using variable costing, the total variable cost to be used in
computing the contribution margin will be:
a. P25,824 c. P18,1 20 e. P20,520
b. P27,384 d. P19,680
Gulliver Company manufactures and sells one product and uses FIFO system.
The following information provided by the company. Total costs were given on the first
year, however no data on cost on year 2 and year 3. Fixed manufacturing costs are
applied to units of product on the basis of the number of units produced each year.
Year I Year 2 Year 3
Direct Materials PI
Direct Labor 480,000
Variable Manufacturing cost 600,000
Variable Selling and Admin Cost

Fixed Manufacturing Overhead
Fixed Selling and Admin Expense
Units Produced 8,000 7,500 10.000
Unit Sold @ P 1,500 per unit 6,000 6,500 13,000

18. If the company uses the absorption costing method, which of the following best
describes the computation of the unit production cost.
a. The total unit product cost will be the same from year I to year 3
regardless of the changes of the units produced and the unit sold every
year.
b. The total unit production cost will change over the years which are
directly related to the units produced. The higher the units produced, the
higher the unit product cost.
c. The total unit production will change over the years but are inversely
related to the units produced. The higher the units produced, the lower
the unit product cost.
d. The total variable portion of the product cost will remain the same
however the fixed overhead will change and will be directly proportional
to the units produced.
e. The total variable portion of the product will remain the same however
the fixed overhead will change and will be indirectly proportional to the
units produced.
19. If the company uses the variable costing method, which of the following best
describes the unit production cost?
a. The total unit product cost will be the same from year I to year 3 regardless
of the changes of the units produced and the unit sold every year.
directly related to the units produced. The higher the units produced,
the higher the unit product cost.
however the fixed overhead will change and will be directly
proportional to the units produced.
units produced.
20. If the company uses the supervariable method, which of the following best
describes the unit production cost?
a. The total unit product cost will be the same from year I to year 3
regardless of the changes of the units produced and the unit sold every
year.
directly related to the units produced. The higher the units produced, the
higher the unit product cost.
however the fixed overhead will change and will be directly proportional
to the units produced.
units produced.
21 . How much is the net income under Absorption Costing Year 2?

a. PI,921 ,OOOe. None of the above
b. PI ,791 ,OOO
22. How much is the net income under Variable Costing Year 2?
e. None of the above
23. How much is the net income under Throughput Costing Year 2?
a.e. None of the above
b.
Shell Corporation manufactures bottled vinegar. Data pertaining to the company's 2017
operations follow: Actual price and cost data for 2017 are as follows:
Selling price P50 Variable Selling cost per P2.80
unit
Direct Material per unit 18 Fixed Selling costs 75,000
Direct Labor per unit 10 Budgeted Production I OO,OOO units
Variable Overhead per 1.50 Actual Production 90,000

unit units
Fixed Overhead 4.20 Sales for the Year 97,500

units
Beginning inventory 1 7,500
units
Fixed manufacturing overhead is assigned to units of production based on a
predetermined rate using the budgeted production which is 100,000 units.
24. How much is the amount to be adjusted to the cost of goods sold under absorption
costing and variable costing, respectively, due to cost variances?
a. P42,OOO over and P42,OOO over
b. P42,OOO under and P42.OOO under
c. PO and PO
d. P42,ooo over and PO
e. P42,OOO under and PO
25. How much is the net income using the absorption costing?
c. PI ,241 ,250 e. None of the above
b. PI .283,250
Problem 2-1. Ichiro Company produces a single product provided the following data
concerning its most recent month of operations: Unit Selling Price — PI 26; Units
Produced — 3, 100; Units Sold — 3,000; Direct Materials per unit — P22; Direct Labor
per unit — P43; Variable Manufacturing Overhead — P3; Variable Selling and admin
expense — PI O; Fixed Manufacturing Overhead — P89,900; Fixed Selling and
Administrative Expense — P42,OOO
Requirements: Fill in the missing amounts

Abso tion Costin Variable Throu h ut Costin
Costin
Product Cost per
Unit
Total Period Cost
Gross Profit/
Contribution
Margin/
Throughput
Mar in
Net Income
Problem 2-2. Yuki Company was organized just a year ago. The results of the company's
first year of operations are shown below under absorption costing:
Income Statement
Sales (2,000 units) P135,OOO

Less: Cost of Goods Sold
Beginning Inventory
Cost of Goods manufactured 105 000
Goods Avaliable for Sale P105,OOO
Ending Inventory 21 84
Gross Margin P51,OOO
Less: Selling and Admin Expense 42 000
Net Income
The company's selling and administrative expense consist of P32,OOO per year
in fixed expenses and P5 per unit sold in variable expenses. The company's unit product
cost is computed as follows: Variable manufacturing cost — P32; Fixed Manufacturing
cost (Based on normal capacity of 2,500 units) — PI O. Compute the net income under
variable costing.
Problem 2-3. Eiji Corporation, developed the following standard unit cost at 100% of
its normal production capacity, which is 20,000 units per year: Prime cost — P4.OO;
Factory overhead (60% fixed) — P5.OO.
Maximum Productive Ca acit 24,000 units er ear
Normal Ca acit 20,000 units
Standard Variable manufacturin cost er unit
Fixed facto overhead P40,OOO
Variable Sellin ex enses er unit
Fixed sellin ex enses P30,OOO
Unit sales rice P20
The product cost is sold for PI 6 per unit. Variable commercial expenses are P2
per unit sold, and fixed commercial expenses total P50,OOO for the period. During the
year, 1 9,000 units were produced and 21 ,OOO units were sold. There is no work in
process beginning or ending inventories, and finished goods inventory is maintained at
standard cost, which has not changed from the preceding year. In the current year,
there is a net favorable variable cost variance in the amount of P5,OOO. All standard
cost variances are written off to cost of goods sold at the end of the period. Compute
the net income under Absorption costing and Variable Costing.
Problem 2-4. The following information pertains to NIDO Company:

Additional information for the current year are as follows: Sales — 19,000 units;
Production — 19,200 units; Net unfavorable variance for standard variable
manufacturing cost - PI 0.000.
Requirements:
Compute the net income under Absorption Costing and Variable Costing
2. Compute the breakeven point in units
3. Compute the margin of safety in units
4. Required sales (pesos) to earn after tax profit of PI 40,000 (tax is 30%)
5. Required sales (pesos) to earn profit of 10% of sales
Problem 2-5. Kutsinta Motors assembles and sells miniature toy motor vehicles and uses
standard costing. Actual data relating to April and May 2020 are as follows:
A ril Ma
Be innin Invento in units 150
Production in units 500 400

Sales in units 350 520
Variable Costs:
Manufacturing cost per unit PIO,OOO P 10,000
Sellin and Admin er unit 3,000 3,000
Fixed Costs:
Manufacturing Cost
Sellin and Admin Cost 600,000 600,000
The selling price per toy vehicle is P24,OOO. The budgeted level of production
used to calculate the budgeted fixed manufacturing cost per unit is 500 units. There
are no price, efficiency, or spending variance. Any production — volume variance is
written off to cost of goods sold in the month in which it occurs.
Requirements:
Prepare the April and May income statement under Absorption and Variable
Costing.
2. Reconcile the costing methods
3. The variable manufacturin costs of Kutsinta Motors are as follows:
April May
Direct Materials P6,700 P6,700
Direct Labor 1 1
,500 ,500
Factory overhead 1,800 I
,800
Prepare the financial statement for Kutsinta in April and May under throughput
costing.
Case 2-1 "Now this doesn't make any sense at all," said Florence Gale, financial vice
president for Warner Bros. Company. "Our sales have been steadily rising over the last
several months, but profits have been going in the opposite direction. In September we
finally hit in sales, but the bottom line for that month drops off to a PI 00.000
loss. Why aren't profits more closely correlated with sales?"
The statements to which Ms Gale was referring are shown below:

July August September
Sales (P25)
Less: Cost of Goods Sold
Beginning Inventory 80 000 320 000 400 000
Cost applied to production:
Variable MFTG cost 765,000 720,000 540,000
Fixed MFTG cost 595 000 560 000 420 000
Cost of Goods Manufactured 1 360 000 1 280 000 960 000
Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold
Under/OverAppIied Fixed OH
Adjusted CGS
Gross Margin
Less: Selling and Admin Expense Net income(loss)
Klein, a new graduate from a USCE who has just been hired by Warner, has stated to
Ms. Gale that the contribution margin approach, with variable costing, is a much better
way to report profit data to management. Sales and production data for the last quarter
follow:
Jul Au ust Se tember
Production in 85,000 80,000 60,000

units
Sales in units 70,000 75,000 80,000
Additional Information about the company's operations is given below:
a. 5,000 units were in inventory on July 1
b. Fixed manufacturing overhead costs total PI per quarter and are incurred evenly
throughout the quarter. This fixed manufacturing overhead cost is applied to
units of product on a basis of a budgeted production volume of 80,000 units per
month
c. Variable selling and admin expenses are P6 per unit sold. The remainder of the
selling and admin expenses on the statements above are fixed.
d. The company uses FIFO inventory flow assumption. Work in process inventories
are insignificant and can be ignored.
"I know production is somewhat out of step with sales," said Karla E, the company's
controller. "But we had to build inventory early in the quarter in anticipation of a strike
in September. Since the union settled without a strike, we than had to cut back
production in September in order to work off the excess inventories. The income
statements you have are completely accurate.
Requirements:
1 . Compute the net income for each month using variable costing
2. Compute the monthly breakeven point under variable costing
3. Explain to Ms. Gale why profits have moved erratically over the three month
period shown in the absorption costing statements above and why profits have
not been more closely rated to changes in sales volume.
YELLOW HIGHLIGHT FOR SURE/CORRECT ANSWERS
GREEN FOR UNSURE
Pre-test - Introduction to Management Accounting
1. The term “price cost” refers to

● the raw material used and direct labor costs
● Raw material purchased and direct labor costs
● All manufacturing costs other than direct labor and raw material costs
● All manufacturing incurred to produce units of output
2. Distribution costs are an example of product costs

● TRUE
● FALSE
3. Cost of Goods Sold is an

● Expired period cost
● unexpired product cost
● Expired product cost
● Unexpired period cost
4. An indirect cost can easily be traced to a cost object -

● False
● True
5. The final figure in th Schedule of Cost of Goods Manufactured represents the

● Total cost of goods started and completed this period
● Total cost of manufacturing for the period
● Cost of goods sold for the period
● Total cost of goods completed for the period
6. Which of the following statements are true regarding financial and managerial
accounting?
I. Both are mandatory
II. Both rely on the same underlying financial data
III. Both emphasize the segments of an organization, rather than just looking at the
organization as a whole
IV. Both are geared to the future, rather than to the past
● II and III
● II, III, and IV
● Only II
● I, II, III, and IV
GREEN FOR UNSURE
7. A __________ provides service or assistance to others parts of the organization and
does not directly achieve the basic objectives of the organization.
● Line function
● Staff function
● Managerial function
● Supervisory function
8. Managerial accounting places less emphasis on precision and more emphasis on

flexibility and relevance of data than does financial accounting -
● True
● False
9. The controller occupies a staff of position in an organization

● True
● False
10. The standards of ethical conduct promulgated by the institute of Management

accountants specifically states, among other things, that management accountants have
a responsibility to inform responsible journalists of any wrongdoing they uncover in the
organization
● False
● True
11. When the number of units manufactures increases, the most significant change in unit
cost will be reflected as a(n)
● Decreased in the fixed element
● Decreased in the variable element
● Increased in the mixed element
● Increased in the fixed element
12. Conversion cost does not include

● Direct labor
● Factory Depreciation
● Supervisor’s salaries
● Direct material
13. An example of fixed cost is

● Straight-line depreciation
● Total indirect material cost
● Total hourly wages
● Cost of electricity
GREEN FOR UNSURE
14. Distribution cost are an example of product costs.

● False
● True
15. Which of the following is not a product cost component?

● Janitorial supplies used in a factory
● Commission on the sale of a product - naa sa quizlet
● ?
● ?
16. Variable cost per unit remains constant within the relevant range.
● True
● False
17.

Ch01 Ch02 PT Bea Spdfs

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ch01 Ch02 PT Bea Spdfs

Uploaded by

Copyright:

Available Formats

After studying this chapter, you will be able to: CHAPTER

1. Crisis Management and response — The Covid-19

Historical Development of Management Accounting

Define Management Accounting

Decision making involves selecting a course of action from competing alternatives. It

Similarities between Financial Accounting and Management Accounting

Differences between Financial Accounting and Management Accounting

While financial accounting reports tend to be based on historical data,

Scope of Management Accounting

You have just learned the basic anatomy of financial

Leadership Skills. Management accountants must have effective leadership skills

Interpersonal Skills. Well-developed interpersonal skills will also be useful for

Career Path of Management Accountants

Cash management includes electronic banking, liquidity management as well as

PLANNING & CONTROLLING CAPITAL PROVISION

REPORTING AND INTERPRETING INVESTOR RELATION

EVALUATING AND CONSULTING SHORT-TERM FINANCING

TAX ADMINISTRATION BANKING AND CUSTODY

GOVERNMENT REPORTING CREDITS AND COLLECTION

ASSET PROTECTION INVESTMENT

APPRAISING THE ECONOMY INSURANCE

IMA Statement of Ethical Professional Practice

Companies should offer financial as well as non-financial reporting incentives, such as

Group # Group Learning Activities

Demonstrate the various roles of a management accountant in an organization.

5 Demonstrate your understanding of the importance of upholding and applying

Managerial Accounting emphasizes precision and company wide reports.

Which of the following best describes the nature of Financial Accounting,

b. Historical Estimates, Futuristic and Historical

c. Historical Estimates, Futuristic and Estimates, Futuristic

3. Which of the following items is/are responsibilities of Management

5. A division manager has concerns about the commercial potential of a software

7. Every Carolinian is expected to personify "Scientia, Virtus, Devotio". The

a. It violates the IMA's Statement of Ethical Professional Practice of

19. The Standards of Ethical Conduct for Practitioners of Management Accounting

3. Generates income tax returns and financial statements required by regulators.

8. Acts as the planning director.

Case Study B: Taking Orders

COSTING vs o Understand the advantages and

DIRECT COSTING costina_

Cebu Pacific Air

Cebu Pacific Air entered the aviation industry on March

ABSORPTION PRODUCT COSTS

For the Year 2018 For the Year 2019

Total P 177,200 321 ,200

Comparison Between AC and DC

DC is usually limited to internal use by company's management. Advocates of DC argue

Arquments for the Use of DC:

Arquments Aqainst DC:

DC is also criticized because no fixed manufacturing cost or fixed factory overhead is

Since AC is 120% of direct costing (P 72 divided by P60), so ending inventory would

P 66 000 = 1,100 units unsold x UPC under AC P72

EFFECT ON NET INCOME

Relationship between Relationship between

FFO expensed under AC is

Net income is higher under

If P < s Inventory decreases;

Net income is lower under

Units in FGI beginning ........................................... 1 ,100

Units sold . 8,900 units 10,900 units

Sales (P 100 per unit x 10,900 units sold) .

Profit under DC or Variable Costing . p 1 14,800