Revised - Approved (With Reminders) CAE-BSA BSMA BSAIS BSIA-2ND SEM-ACC 213 Strategic Cost Management

UNIVERSITY OF MINDANAO
College of Accounting Education

Program: BSA, BSIA, BSMA, BSAIS
Physically Distanced but Academically Engaged
Self-Instructional Manual (SIM) for Self-Directed Learning (SDL)
Course/Subject: ACC 213 – STRATEGIC COST MANAGEMENT
Name of Teacher: _____________________________

Name of Author: MYRA T. MIRAFLORES, CPA
THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

REPRODUCTION AND DISTRIBUTION OUTSIDE OF ITS INTENDED USE.
THIS IS INTENDED ONLY FOR THE USE OF THE STUDENTS WHO ARE
OFFICIALLY ENROLLED IN THE COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.
COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137
TABLE OF CONTENTS
Page No.
Course Outline iv
Course Outline Policy iv
Course Information viii
Big Picture Week 1-3: Unit Learning Outcomes 1

Big Picture in Focus: Introduction to Cost Management (ULO a) 1
Metalanguage 1
Essential Knowledge 2
Self-Help 7
Let’s Check 7
Let’s Analyze 9
In A Nutshell 10
Q&A List 11
Keywords Index 11
Big Picture in Focus: Introduction to Cost Management (ULO b) 12
Metalanguage 12
Research Work 12
Self-Help 18
Let’s Check 18
Let’s Analyze 20
In A Nutshell 21
Q&A List 22
Keywords Index 22
Big Picture in Focus: Cost-Volume-Profit (CVP) Analysis (ULO c) 23
Metalanguage 23
Self-Help 39
Let’s Check 39
Let’s Analyze 41
In A Nutshell 44
Q&A List 46
Keywords Index 46
Big Picture in Focus: Absorption vs. Variable Costing (ULO d-f) 47
Metalanguage 47
Self-Help 55
Let’s Check 55
Let’s Analyze 60
In A Nutshell 63
Q&A List 64
Keywords Index 64
Course Schedule Weeks 1-3 65
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Telefax: (082)305-5456
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Big Picture Week 4-5: Unit Learning Outcomes 66

Big Picture in Focus: Strategic Cost Management (ULO a) 66
Metalanguage 66
Self-Help 74
Let’s Check 74
Let’s Analyze 76
In A Nutshell 77
Q&A List 78
Keywords Index 78
Big Picture in Focus: Balanced Scorecard (ULO b) 79
Metalanguage 79
Self-Help 83
Let’s Check 83
Let’s Analyze 84
In A Nutshell 86
Q&A List 88
Keywords Index 88
Big Picture Weeks 6-7: Unit Learning Outcomes 90

Big Picture in Focus: Budgeting for Planning and Control (ULO a) 90
Metalanguage 90
Exercise: Developing a Master Budget 95
Self-Help 98
Let’s Check 98
Let’s Analyze 101
In A Nutshell 103
Q&A List 103
Keywords Index 103
Big Picture in Focus: Activity-based Management (ULO b) 104
Metalanguage 104
Self-Help 109
Let’s Check 110
Let’s Analyze 111
In A Nutshell 112
Q&A List 113
Keywords Index 113
Big Picture Weeks 8-9: Unit Learning Outcomes 115

Big Picture in Focus: Quality and Environmental Cost Management (ULO a) 115
Metalanguage 115
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Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137
Self-Help 119
Let’s Check 119
Let’s Analyze 120
In A Nutshell 121
Q&A List 122
Keywords Index 122
Big Picture in Focus: Inventory Management (ULO b) 123
Metalanguage 123
Self-Help 130
Let’s Check 130
Let’s Analyze 131
In A Nutshell 132
Q&A List 133
Keywords Index 133
Big Picture in Focus: Lean Accounting and Productivity Measurement (ULO c) 134
Metalanguage 134
Self-Help 136
Let’s Analyze 136
In A Nutshell 137
Q&A List 138
Keywords Index 138
Online Code of Conduct 140
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Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137
Course Outline: ACC 213 – STRATEGIC COST MANAGEMENT
Course Coordinator: Myra T. Miraflores

Email: myra_miraflores@umindanao.edu.ph
Student Consultation: By appointment
Mobile: 0917-8135633
Phone: (082) 300-5456 loc. 137
Effectivity Date: May 25, 2020
Mode of Delivery: Blended (On-Line with face to face or virtual sessions)
Time Frame: 54 Hours
Student Workload: Expected Self-Directed Learning
Pre-requisite: ACCTG 10a – Cost Accounting and Cost
Management, Part 2
Credit: 3
Attendance Requirements: A minimum of 95% attendance is required at all
scheduled Virtual or face to face sessions.
Course Outline Policy
Areas of Concern Details

Contact and Non-contact This 3-unit course self-instructional manual is designed for blended
Hours learning mode of instructional delivery with scheduled face to face
or virtual sessions. The expected number of hours will be 54
including the face to face or virtual sessions. The face to face
sessions shall include the summative assessment tasks (exams)
since this course is crucial in the Certified Public Accountant
Licensure Examination (CPALE).
Assessment Task Submission of assessment tasks shall be on 3 rd, 5th, 7th and 9th week
Submission of the term. The assessment paper shall be attached with a cover
page indicating the title of the assessment task (if the task is
performance), the name of the course coordinator, date of
submission and name of the student. The document should be
emailed to the course coordinator. It is also expected that you
already paid your tuition and other fees before the submission of the
assessment task.
If the assessment task is done in real time through the features in

the Blackboard Learning Management System, the schedule shall
be arranged ahead of time by the course coordinator.
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Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137
Since this course is included in the CPALE, you will be required to

take the Multiple Choice Question exam inside the University. This
should be scheduled ahead of time by your course coordinator.
This is non-negotiable for all licensure-based programs.
Turnitin Submission To ensure honesty and authenticity, all assessment tasks are
(if necessary) required to be submitted through Turnitin with a maximum similarity
index of 30% allowed. This means that if your paper goes beyond
30%, the students will either opt to redo her/his paper or explain in
writing addressed to the course coordinator the reasons for the
similarity. In addition, if the paper has reached more than 30%
similarity index, the student may be called for a disciplinary action in
accordance with the University’s OPM on Intellectual and Academic
Honesty.
Please note that academic dishonesty such as cheating and

commissioning other students or people to complete the task for you
have severe punishments (reprimand, warning, expulsion).
Penalties for Late The score for an assessment item submitted after the designated
Assignments/Assessments time on the due date, without an approved extension of time, will be
reduced by 5% of the possible maximum score for that assessment
item for each day or part day that the assessment item is late.
However, if the late submission of assessment paper has a valid

reason, a letter of explanation should be submitted and approved by
the course coordinator. If necessary, you will also be required to
present/attach evidences.
Return of Assignments/ Assessment tasks will be returned to you two (2) weeks after the
Assessments submission. This will be returned by email or via Blackboard portal.
For group assessment tasks, the course coordinator will require

some or few of the students for online or virtual sessions to ask
clarificatory questions to validate the originality of the assessment
task submitted and to ensure that all the group members are
involved.
Assignment Resubmission You should request in writing addressed to the course coordinator
his/her intention to resubmit an assessment task. The resubmission
is premised on the student’s failure to comply with the similarity index
and other reasonable grounds such as academic literacy standards
or other reasonable circumstances e.g. illness, accidents financial
constraints.
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Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137
Re-marking of You should request in writing addressed to the program coordinator

Assessment Papers and your intention to appeal or contest the score given to an assessment
Appeal task. The letter should explicitly explain the reasons/points to contest
the grade. The program coordinator shall communicate with the
students on the approval and disapproval of the request.
If disapproved by the course coordinator, you can elevate your case

to the program head or the dean with the original letter of request.
The final decision will come from the dean of the college.
Grading System All culled from BlackBoard sessions and traditional contact
Course discussions/exercises – 30%
1st formative assessment – 10%
2nd formative assessment – 10%
3rd formative assessment – 10%
All culled from on-campus/onsite sessions (TBA):

Final exam – 40%
Submission of the final grades shall follow the usual University

system and procedures.
Preferred Referencing Harvard Referencing Style

Style
Student Communication You are required to create a umindanao email account which is a
requirement to access the BlackBoard portal. Then, the course
coordinator shall enroll the students to have access to the materials
and resources of the course. All communication formats: chat,
submission of assessment tasks, requests etc. shall be through the
portal and other university recognized platforms.
You can also meet the course coordinator in person through the
scheduled face to face sessions to raise your issues and concerns.
For students who have not created their student email, please
contact the course coordinator or program head.
Contact Details of the Lord Eddie I. Aguilar

Dean Dean
Email: aguilar_lordeddie@umindanao.edu.ph
Phone: (082) 3050645 local 137
Contact Details of the Mary Grace S. Sombilon

Assist. Dean and Program Assistant Dean
Heads Email: sombilon_marygrace@umindanao.edu.ph
Phone: (082) 3050645 local 137
Jade Solana CPA, MBA

Program Head – BSA, BSMA
Email: jd_solana@umindanao.edu.ph
Phone: (082) 3050647 local 137
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Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137
Devzon U. Porras
Program Head - BSIA, BSAIS
Email: dporras@umindanao.edu.ph
Phone: (082) 3050645 local 137
Students with Special Students with special needs shall communicate with the course
Needs coordinator about the nature of his or her special needs. Depending
on the nature of the need, the course coordinator with the approval
of the program coordinator may provide alternative assessment
tasks or extension of the deadline of submission of assessment
tasks. However, the alternative assessment tasks should still be in
the service of achieving the desired course learning outcomes.
Library Contact Brigida E. Bacani

Email: library@umindanao.edu.ph
Phone: 09513766681
for inquiries, you can email at umlic.eresources@gmail.com,

raphael_digal@umindanao.edu.ph or
chat with us here http://library.umindanao.edu.ph/
Facebook page: https://www.facebook.com/UM-Learning-and-
Information-Center-Davao-City-962331877193048/
Well-being Welfare Ronadora E. Deala

Support Help Desk GSTC Head
Contact Email: Ronadora_deala@umindanao.edu.ph
Phone: 09212122846
Zerdszen P. Rañises
GSTC Facilitator
Emai: gstcmain@umindanao.edu.ph
Phone: 09058924090
GSTC Facebook Page:

https://facebook.com/UM-GSTC-Main-CAE-
111901303784349/?modal=admin_todo_tour
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Course Information – see/download course syllabus in the Black Board LMS
CC’s Voice: Hello student! Welcome to this course ACC 213: Strategic Cost
Management. One of the areas that a competent accounting practitioner
must be adept with is cost accounting and management. At this point in
your journey as an accounting student, you have already been oriented
on the basics of cost accounting and management, the cost behavior
and the different methods of cost accumulation and allocation.
CO The course ACC 213 is designed to deepen your knowledge on cost

management. This course aims to acquaint the students with the impact
of changes in costs and volume to a company’s profit; advances in cost
management, such as activity-based cost management system, CVP
analysis and absorption and variable costing; concepts related to
management control systems such as strategic cost management,
balanced scorecard and budgeting for planning and control; advances
in inventory and production management and accounting principles and
practices such as economic order quantity, Just-In-Time manufacturing,
backflush costing, lean accounting and productivity measurement. At
the end of this course, you are expected to be able to explain the basic
concepts and practices in cost management, apply knowledge in
problem solving using relevant managerial tools in decision-making and
prepare a Master Budget.
Let us begin!
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Matina, Davao City
Phone No.: (082)300-5456 Local 137
Big Picture
Weeks 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected
to
a. Explain the nature and characteristics of cost management.

b. Discuss the role of management accountants and the importance of ethical
standards.
c. Apply cost-volume-profit analysis in both single- and multiple-product settings.
d. Discuss the difference between absorption and variable costing.
e. Prepare income statement using absorption and variable costing.
f. Reconcile absorption costing income with variable costing income.
Introduction to Cost Management (a)
Big Picture in Focus: ULOa. Explain the nature and characteristics

of cost management.
Metalanguage
In this section, the most essential terms relevant to the study of cost management
and to demonstrate ULOa will be operationally defined to establish a common frame
of reference as to how the texts work in your chosen field or career. You will encounter
these terms as we go through the study of cost management. Please refer to these
definitions in case you will encounter difficulty in understanding cost management
concepts.
1. System. It is a set of interrelated parts that performs one or more processes to

accomplish specific objectives.
2. Accounting information system. It is a system that consists of interrelated
manual and computer parts and uses processes such as collecting, recording,
summarizing, analyzing and managing data to provide information to users.
3. Financial accounting system. It is primarily concerned with producing information
for the company’s external information users.
4. Cost management system. It is primarily concerned with producing outputs for
internal information users, using inputs and processes needed to satisfy
management objectives.
5. Planning. This refers to a basic management function which is the setting of an
organization’s goals and deciding how best to achieve them. It is the detailed
formulation of action to achieve a particular end.
6. Controlling. This is the final phase of the management process which is the
monitoring of the organization’s progress toward its goal attainment. It is the
monitoring of a plan’s implementation
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7. Decision making. This is a part of the planning process that involves selecting a
course of action from a set of competing alternatives.
8. Cost accounting system. This is a cost management subsystem designed to
assign costs to individual products and services and other cost objects specified
by management.
9. Operational control system. This is another cost management subsystem
designed to provide accurate and timely feedback concerning the performance of
managers and others relative to their planning and control of activities.
10. Cost accounting. This is a branch of accounting that deals with a systematic set
of procedures for recording and reporting measurements of the cost of
manufacturing goods and performing services in the aggregate and in detail.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first three
(3) weeks of the course, you need to fully understand the following essential
knowledge that will be laid down in the succeeding pages. Please note that you are
not limited to exclusively refer to these resources. Thus, you are expected to utilize
other books, research articles and other resources that are available in the university’s
library e.g. ebrary, search.proquest.com etc.
Accounting Information System
A system is a set of interconnected parts composed of one or more processes to

meet identified objectives. Like any system, an accounting information system has
objectives, interrelated processes, and outputs. Its ultimate objective is to provide
information to users.
Figure 1. The Accounting Information System
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The interrelated processes include collecting, recording, summarizing, and

managing data. There are some processes that use inputs and provide recommended
decisions as the information output. The outputs may be in the form of data and reports
that provide users with their required information. The operational model for an
accounting information system is illustrated in Figure 1.
The accounting information system has two major interrelated subsystems: (1)
the financial accounting system and (2) the cost management system. Ideally, the
two subsystems should be integrated and have linked databases. The output of each
subsystem can be utilized as input for the other.
Cost Management System vs. Financial Accounting System
Criteria Cost Management Financial Accounting

System System
Target users of output Internal information users External information users
Nature of inputs and Not bound by externally Must follow GAAP when
processes imposed criteria preparing outputs such as
financial statements
Types of information Financial (cost Financial information

produced information) and
nonfinancial information
Uses of information 1. Costing of products, 1. Investment decisions

produced services and other 2. Stewardship evaluation
objects of interest to
(broad objectives)
management; 3. Activity monitoring
2. Planning and control; 4. Regulatory measures
and,
3. Decision-making
Cost Management Systems

A cost management system is primarily concerned with producing outputs for
internal information users, using inputs and processes needed to satisfy management
objectives. A cost management information system is not bound by externally imposed
criteria that define inputs and processes. Instead, the criteria that govern the inputs
and processes are set by people within the company.
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Broad Objectives:
1. The information requirements for costing purposes depend on the nature of the
object being costed and the reason management wants to know the cost.
2. Cost information is also used for planning and control. It should help managers
decide what should be done, why it should be done, how it should be done, and
how well it is being done.
3. Finally, cost information is a critical input for many managerial decisions.
Cost Management Subsystems
A cost management system consists of two major subsystems: the cost

accounting system and the operational control system.
1. The cost accounting system is a cost management subsystem designed to

assign costs to individual products and services and other cost objects as
specified by management. For external financial reporting, the cost accounting
system must assign costs to products in order to value inventories and determine
cost of goods sold. These assignments must conform to the rules and conventions
set by the SEC and the financial accounting standard-setting body. Using financial
accounting principles to define product costs may lead to under-and over-
statements of individual product costs.
2. The operational control system is a cost management subsystem designed to

provide accurate and timely feedback concerning the performance of managers
and others relative to their planning and control of activities. Operational control is
concerned with what activities should be performed and assessing how well they
are performed. It focuses on identifying opportunities for improvement and helping
to find ways to improve. A good operational control system provides information
that helps managers engage in a program of continuous improvement of all
aspects of their businesses.
Factors Affecting Cost Management
“Change has come”. This is one of the famous lines of the incumbent
administration. This is not only true in the political arena but as well as in the business
world. Innovation has become a byword in the leading organizations worldwide with
the intensification of global as well as domestic competition. In order to attain and
maintain competitive advantage, a firm has to be innovative in addressing the
changing and increasing needs of the consumers. Product development has therefore
become a necessity to stay competitive. Furthermore, these changes, as described
below, have prompted the development of innovative and relevant cost management
practices. To provide you with these specific events, here are some excerpts from a
reference book.
1. Global Competition. Improvement in transportation and communication systems

have led to a global market for many manufacturing and service firms. This new
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competitive environment has increased the demand for more accurate cost
information that plays a vital role in reducing costs, improving productivity, and
assessing product-line profitability (Hansen, Mowen & Liming, 2009).
2. Growth of the Service Industry. Many services such as accounting,

transportation, and medical services are exported. The increased competition has
made managers in this industry more conscious of the need to have accurate cost
information for planning, controlling, continuous improvement, and decision
making. Thus, the changes in the service sector add to the demand for innovative
and relevant cost management systems (Hansen, Mowen & Liming, 2009).
3. Advances in Information Technology.

a. Computer-integrated applications. With automated manufacturing,
computers are used to monitor and control operations. Because a computer is
being used, a considerable amount of useful information can be collected, and
managers can be informed about what is happening within an organization
almost as it happens (Hansen, Mowen & Liming, 2009).
b. An enterprise resource planning (ERP) system is a centralized database

system that integrates all functional areas of a firm and provides access to real-
time data from any functional area of the firm. Using this real-time data enables
managers to continuously improve the efficiency of organizational units and
processes (Hansen, Mowen & Liming, 2009).
c. Availability of personal computers (PCs), online analytic programs

(OLAP), and decision support systems (DSS). The PC serves as a
communication link to the company’s information system, and OLAP and DSS
supply managers with the capability to use that information. The PC acts as a
networking terminal connected to an organization’s database, allowing
managers to access information more quickly for analysis and report
preparation. This enhances the firm’s ability to provide accurate product cost
(Hansen, Mowen & Liming, 2009).
d. Emergence of electronic commerce. Electronic commerce (e-commerce)

is any form of business that is executed using information and communications
technology. Internet trading, electronic data interchange, and bar coding are
examples of e-commerce. Internet trading allows buyers and sellers to come
together and execute transactions from diverse locations and circumstances.
Electronic data interchange (EDI) involves the exchange of documents
between computers using telephone lines and is widely used for purchasing
and distribution. The sharing of information among trading partners reduces
costs and improves customer relations, thus leading to a stronger competitive
position. EDI is an integral part of supply chain management. Supply chain
management is the management of products and services from the acquisition
of raw materials through manufacturing, warehousing, distribution, wholesaling,
and retailing (Hansen, Mowen & Liming, 2009).
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4. Advances in the Manufacturing Environment.

a. Theory of Constraints. A method used to continuously improve
manufacturing and nonmanufacturing activities. It is characterized as a
“thinking process” that begins by recognizing that all resources are finite. Some
resources, however, are more critical than others. The most critical limiting
factor, called a constraint, becomes the focus of attention. By managing this
constraint, performance can be improved. To manage the constraint, it must
be identified and exploited. All other actions are subordinate to the exploitation
decision. Finally, to improve performance, the constraint must be elevated. The
process is repeated until the constraint is eliminated. The process then begins
anew with the resource that has now become the critical limiting factor
b. Just-in-Time Manufacturing. A demand-pull system, just-in-time (JIT)

manufacturing strives to produce a product only when it is needed and only
in the quantities demanded by customers. Demand pulls products through the
manufacturing process. Each operation produces only what is necessary to
satisfy the demand of the succeeding operation. No production takes place
until a signal from a succeeding process indicates the need to produce. Parts
and materials arrive just in time to be used in production (Hansen, Mowen &
Liming, 2009).
c. Computer-Integrated Manufacturing. Automation of the manufacturing

environment leads to reduction in inventory, increase in productive capacity,
improvement in quality of product and service, decrease in processing time,
and increase in output. It may mean installation of a computer-integrated
manufacturing (CIM) system which has the following capabilities: (1) the
products are designed through the use of a computer-assisted design (CAD)
system; (2) a computer assisted engineering (CAE) system is used to test the
design; (3) the product is manufactured using a computer-assisted
manufacturing (CAM) system; and (4) an information system connects the
various automated components (Hansen, Mowen & Liming, 2009).
5. Customer Orientation. Firms are concentrating on the delivery of value to the

customer with the objective of establishing customer loyalty. This refers to a firm’s
value chain as the set of activities required to design, develop, produce, market,
and deliver products and services to customers. Delivery of the product or service
is now included as part of the product. Firms must compete not only in
technological and manufacturing terms but also in terms of the speed of delivery
and response (Hansen, Mowen & Liming, 2009).
6. New Product Development. More sophisticated cost management procedures

relating to new product development are now recognized. Target costing
encourages managers to assess the overall cost impact of product designs over
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the product’s life cycle and simultaneously provides incentives to make design
changes to reduce costs. Activity-based management identifies the activities
produced at each stage of the development process and assesses their costs.
Activity-based management is complementary to target costing because it enables
managers to identify the activities that do not add value and then eliminate them
so that overall life cycle costs can be minimized (Hansen, Mowen & Liming, 2009).
7. Total Quality Management. A philosophy of total quality management (TQM),

in which managers strive to create an environment that will enable firms to produce
defect-free products and services, has replaced the acceptable-quality attitudes of
the past. The cost management system provides crucial information concerning
quality-related activities and quality costs. Managers need to know which quality-
related activities add value and which ones do not. They also need to know what
quality costs are and how they change over time (Hansen, Mowen & Liming, 2009).
8. Time as a Competitive Element. Time is a crucial element in all phases of the

value chain. Firms can reduce time to market by redesigning products and
processes, by eliminating waste, and by eliminating non-value-added activities.
Firms can reduce the time spent on delivery of products or services, reworking a
product, and unnecessary movements of materials and subassemblies. Reducing
non-value-added time must go hand-in-hand with increasing quality (Hansen,
Mowen & Liming, 2009).
9. Efficiency. While quality and time are important, improving these dimensions
without corresponding improvements in financial performance may be futile, if not
fatal. Improving efficiency is also a vital concern. Both financial and nonfinancial
measures of efficiency are needed. Cost is a critical measure of efficiency
Self-Help: You can also refer to the sources below to help you further
understand the lesson. You can also use other materials.
Hansen, D., Mowen, M., & Liming, G. 2009, Cost Management Accounting & Control, 6th Edition,
Cengage Learning, Mason, OH.
Horngren, C., Datar, S. & Rajan, M. 2015, Cost Accounting A Managerial Emphasis, 15th Edition,
Pearson Education Limited, England.
Let’s Check
Activity 1. Now that you have been taught the most essential terms in the study of
cost management system, let us try to check your recollection of these terms. On the
space provided, write the letter assigned to the term listed below that corresponds to
each of the following descriptions:
_______1. the detailed formulation of action to achieve a particular objective
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_______2. managers strive to create an environment that will enable firms to produce
defect-free products and services
_______3. encourages managers to assess the overall cost impact of product
designs over the product’s life cycle and simultaneously provides
incentives to make design changes to reduce costs
_______4. consists of interconnected parts that uses processes such as collecting,
recording, summarizing, analyzing and managing data to provide
information to users
_______5. installed for the automation of a manufacturing environment
_______6. a system that is designed to assign costs to individual products and
services and other cost objects specified by management
_______7. a demand-pull system that produces a product only when it is needed and
only in the quantities demanded by customers
_______8. an area of accounting that measures, records, and reports information
about costs
_______9. focuses on eliminating the critical limiting factor in improving activities
______10. involves the exchange of documents between computers using telephone
lines and is widely used for purchasing and distribution
______11. a broad concept that involves producing outputs for internal information
users, using inputs and processes needed to satisfy management
objectives
______12. the management of products and services from the acquisition of raw
materials through manufacturing, warehousing, distribution, wholesaling,
and retailing
______13. a system designed to provide accurate and timely feedback concerning
the performance of managers and others relative to their planning and
control of activities
______14. a centralized database system that allows access to real-time data from
any functional area of the firm
______15. the monitoring of a plan’s implementation
A. Accounting Information System H. Target Costing O. ERP

B. Theory of Constraints I. Cost Accounting P. System
C. E-commerce J. Operational Control System Q. TQM
D. Cost Management System K. Decision-making R. EDI
E. Controlling L. Supply Chain Management S. JIT
F. Global Competition M. Cost Accounting System T. CIM
G. Financial Accounting N. Planning U. OLAP
Let’s Check
Activity 2. You were oriented on the two major subsystems of the accounting
information system and their differences. Let us try to check if you can classify the
activities listed below. On the space provided, write FA (financial accounting) or CM
(cost management).
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_____1. Preparing a performance report that compares actual costs with budgeted
costs
_____2. Preparing financial statements that conform to GAAP
_____3. Determining the cost of a supplier
_____4. Using a cost information to decide whether to accept or reject a special order
_____5. Reporting a large contingent liability to current and potential shareholders
_____6. Determining the future cash flows of a proposed JIT manufacturing system
_____7. Filing financial reports with the SEC
_____8. Determining the cost of a customer
_____9. Issuing a voluntary annual report on environmental costs and issues
____10. Reducing costs by eliminating activities that do not add value
Let’s Analyze
Activity 1. You are now familiar with the essential terms in the study of cost
management system. But it is important that you are also able to discuss confidently
the concepts introduced. Below are some writing instructions for you. On the space
provided, please write a thorough discussion of the required information.
1. Explain how a cost management system operates.
___________________________________________________________________
___________________________________________________________________
2. Discuss the three objectives of cost management system.
___________________________________________________________________
___________________________________________________________________
3. Describe the two subsystems comprising the cost management system.
___________________________________________________________________
___________________________________________________________________
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In a Nutshell
Activity 1. The concept of cost management has been likened to any kind of system
that requires inputs in order to provide outputs to various users depending on their
needs and requirements.
Based on the definition of the most essential terms in the study of cost management
and the learning exercises that you have done, please feel free to write your
arguments or lessons learned below. I have indicated my arguments or lessons
learned.
1. Cost management system is half of a broader system, called Accounting

Information System (AIS), and thus, plays an important role in the
accumulation and management of data and information crucial in realizing
organizational goals and objectives.
2. If financial accounting system, the other half of the AIS, provides a bigger
picture of the financial condition of the organization, the cost management
system, on the other hand, magnifies the smaller portions that led to the bigger
picture.
Your Turn
3. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
4. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
5. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
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Q&A LIST
Do you have any question/issue/concern for clarification? Please list them down
below and raise them formally by posting the list in the designated forum section. Your
teacher or any of your classmates may provide the answer or clarification you need.
Once satisfied, you return to this list and write the corresponding answers in your own
words. This list will help you in the review of the concepts and essential knowledge.
Questions / Issues / Concerns Answers
1.
2.
3.
4.
5.
KEYWORDS INDEX
In this section, keywords are listed down to help you recall the lesson. The list may
include concepts, ideas, theories, names of people and other vital terms to remember
that may or may not necessarily be found in the Metalanguage section. You may refer
to this list as you review the lesson.
Activity-based Management Cost Accounting System Planning
Accounting Information System Decision-making Supply Chain Management
Continuous Improvement Financial Accounting System Target Costing
Controlling Global Competition Theory of Constraints
Cost Accounting Just-In-Time Mfg. Total Quality Management
Cost Management System Operational Control System Value Chain
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Introduction to Cost Management (b)
Big Picture in Focus: ULOb. Discuss the role of management

accountants and the importance of ethical standards.
Metalanguage
For you to demonstrate ULOb, you will need to have an operational

understanding of the terms listed below. Please note that you will also be required to
refer to the previous definitions found in ULOa section.
1. Management (managerial) accounting. It is the branch of accounting that is

primarily concerned with providing economic and financial information for internal
users, particularly the managers or the decision-makers in an organization.
2. Management accountant. The one responsible for generating financial and non-
financial information required by the firm for internal and external reporting. This
involves responsibility for collecting, processing, and reporting information that will
help managers in their planning, controlling, and other decision-making activities.
3. Business ethics. It is learning what is right or wrong in the work environment and
choosing what is right. It could also be described as the science of conduct for the
work environment.
4. Principles of personal ethical behavior. This may include concern for the well-
being of others, respect for others, trustworthiness and honesty, fairness, doing
good, and preventing harm to others.
5. Ethical behavior principles for professionals. This can be expanded to include
concepts such as objectivity, full disclosure, confidentiality, due diligence, and
avoiding conflicts of interest.
Essential Knowledge
In the previous lesson, cost management system has been compared with
financial accounting system. Now to deepen your understanding on related concepts
as a prelude to discussing the role of management accountants, let us extend our
examination on the relationship of financial accounting, this time, to management
accounting and cost accounting.
Research Work
Utilize the university’s online library resources e.g. ebrary, search.proquest.com etc.
On a single A-4 document, compare and contrast financial accounting, management
accounting and cost accounting as illustrated in Figure 2. Identify similarities as well
as differences. List down your sources using APA format. Submit your assignment to
the designated section in your Black Board LMS on or before the specified date and
time.
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Figure 2. Comparison of Finansial, Management, and Cost Accounting
Management Functions and the Need for Managerial Accounting Information
1. Planning. This is the detailed formulation of future actions to achieve a particular

end. Planning therefore requires setting objectives and identifying methods to
achieve those objectives.
2. Controlling. This management activity is a set of processes in monitoring a plan’s

implementation and taking corrective action as needed. Control is usually
achieved with the use of feedback. Feedback is information that can be used to
evaluate or correct the steps that are actually being taken to implement a plan.
Accounting reports that provide feedback by comparing planned (budgeted) data
with actual data are called performance reports.
3. Continuous Improvement. This refers to “the relentless pursuit of improvement

in the delivery of value to customers.” It is searching for ways to increase overall
efficiency by reducing waste, improving quality, and reducing costs.
4. Decision Making. This is the process of choosing among competing alternatives.

Decisions can be improved if information about the alternatives is gathered and
made available to managers.
Financial Accounting vs. Management Accounting

Criteria Financial Accounting Management Accounting
Users of report External information users: Internal information users:
investors, creditors, officers and managers
government, etc.
Purpose To provide external users To provide internal users with

with information about the information that may be used
organization’s financial by managers in carrying out
position and results of management functions.
operation.
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Types of reports Primarily financial statements Budgets, financial projections,

with accompanying notes to cost analysis, etc. depending
FS on the specific needs of
management
Standards of presentation Must follow GAAP and other Management can set the
pronouncements of rules in producing the
authoritative accounting information most relevant to
bodies its specific needs
Reporting entity Reports relate to the Focus of report is on the

business as a whole company’s value chain (i.e.
business segment, product
line, supplier or customer);
Period covered by reports Year, semi, quarter, or month Any time period (i.e. year,
quarter, month, week, day,
etc.);
As needed by Mgmt.
Others Historical in nature Deals with the future

Accounting and finance Multidisciplinary
Focuses on the process of Focuses on the usefulness of
FS preparation FS
Precision Timeliness
Cost Accounting encompasses both financial accounting and management accounting.
Management Accounting is the application of appropriate techniques and concepts

in processing the historical and projected economic data (including costs) of an entity
to assist management in establishing a plan for reasonable economic objectives and
in the making of rational decisions with a view towards achieving these objectives
(AAA Committee on Management Accounting).
Objectives of Management Accounting

1) Costing 2) Planning and control 3) Decision-making
Application of Management Accounting

Managerial accounting provides the economic information needed by:
1. Businesses/business managers – for the attainment of their profit or economic
goals.
2. Non-profit organizations – for the attainment of their organizational objectives
Activities involved in Management Accounting

1. Determining, accumulating and explaining costs (both manufacturing and non-
manufacturing)
2. Computing or determining product cost or service cost
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3. Determining cost behavior

4. Providing assistance to management in profit planning/ budgeting
5. Accumulating and presenting data which may be used by managers in decision-
making
6. Providing bases for cost control with the use of standard costs and other planned
objectives
7. Assisting managers in developing the company’s prices both for external and
internal transactions
Strategic Decisions and Management Accounting–key to a company’s success in

creating value for customers while differentiating itself from its competitors
1. Strategy: how an organization uses what it has, to get what it wants within the
market
2. Two broad strategies used:
a. Providing a quality product or service at a lower price than competitors
b. Providing a unique product or service at a higher price than competitors
Role of Management Accountant

Management accountants perform staff functions. They are considered as staff
management providing advice and assistance to line management such as
manufacturing and marketing. Line managers are directly responsible for attaining the
goals of the organization.
Line personnel – directly involved in carrying out the mission of the organization (e.g.
assembly workers in a factory, doctors in a hospital, teachers in a school)
Staff personnel – provide support for the organization’s mission (e.g. accountants,
lawyers, personnel directors, and other administrative positions)
The head of a management accounting group in an organization is the

management accountant. He may take different position such as Vice President for
Finance, Chief Financial Officer (CFO), Budget Director or Accounting Manager.
Traditionally, a management accountant is called Controller (or Comptroller).
The responsibilities of the CFO vary among organizations, but they usually
include the following areas:
1. Controllership includes providing financial information reports to managers and
reports to stockholders and overseeing the overall operations of the accounting
system.
2. Treasury includes banking and short- and long-term financing, investments and
management of cash.
3. Risk management includes managing the financial risk of interest-rate and
exchange-rate changes and derivatives management.
4. Internal audit includes reviewing and analyzing the financial and other records to
attest to the integrity of the organization’s financial reports and to adherence to its
policies and procedures.
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Basic Functions
Controllership Treasurership
1. Planning and controlling 1. Provision of capital
2. Reporting and interpreting 2. Investor relations
3. Evaluation and consulting 3. Short-term financing
4. Tax administration 4. Banking and custodianship
5. Government reporting 5. Credit and collection
6. Protection of assets 6. Investments
7. Economic appraisal 7. Insurance
Certification Programs Available to Management Accountants

1. Certificate in Management Accounting (CMA) – developed by the Institute
of Management Accountants (IMA) with covers four areas: (1) business
analysis, (2) management accounting and reporting, (3) strategic management,
and (4) business application
2. Certificate in Internal Auditing (CIA) – administered by the Institute of
Internal Auditors (IIA)
3. Certificate in Financial Management (CFM)
Code of Conduct for Management Accountants

There are two (2) parts of the standard.
I. General guidelines for ethical behavior. Management Accountants have ethical
responsibilities in four (4) broad areas namely:
1) To maintain a high level of professional competence,
2) To treat sensitive matters with confidentiality,
3) To maintain personal integrity, and
4) To be objective in all disclosing.
II. Specific guidance concerning what should be done if an individual finds evidence
of ethical misconduct within an organization.
Below are some consequences of not abiding by the standards.
1. Suppose employees could not be trusted with confidential information. This result
to Top Management’s reluctance to distribute confidential information within the
company leading to decisions being made based on incomplete information and
therefore may cause deterioration of operations.
2. Suppose employees accept bribes from suppliers. This can lead to higher costs
but at low quality.
3. Suppose CEO’s or presidents of companies routinely lied in their annual reports to
shareholders and grossly distorted financial statements. Investors and creditors
would have little basis for making informed decision. Lesser funds would be made
available for productive investments and many firms might be unable to raise any
funds at all. This would ultimately lead to slower economic growth, fewer goods
and services and higher prices.
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Standards of Ethical Conduct for Management Accountants

Giving serious attention to business ethics can bring significant benefits to a
business entity. Companies with a strong code of ethics most likely enjoy strong
customer and employee loyalty and a lot more. In the same manner, management
accountants have an obligation to the organizations they serve, their profession, the
public and themselves to maintain the highest standards of ethical conduct. In
recognition of this obligation, the Institute of Management Accountants (IMA), formerly
the National Association of Accountants (NAA), has promulgated the following
standards of ethical conduct for management accountants. Adherence to these
standards is integral to achieving the objectives of management accounting.
Management accountants shall not commit acts contrary to these standards nor shall
they condone the commission of such acts by others within their organizations.
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:
1. 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.
II. 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.
III. Integrity
1. Mitigate actual conflicts of interest, regularly communicate with business associates to
avoid apparent conflicts of interest. Advise all parties of any potential conflicts.
2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
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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.
Source: Institute of Management Accountants (http://www.imanet.org). Adapted with permission 2006.
(Hansen & Mowen, 2015)
Let’s Check
Activity 1. Please encircle the letter under each item that best reflects your answer.
1. In the planning and control process, what is the proper sequence of events?
a. set goals, set objectives, develop plans, implement plans, evaluate
performance
b. establish a master budget, set standard costs, develop variance analysis
c. develop engineered costs, develop pricing targets, calculate contribution
margins
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d. identify variable costs, identify fixed costs, project the sales mix, determine
break-even
2. Management accounting
a. is governed by generally accepted accounting principles.
b. is geared primarily to the past rather than the future.
c. draws from disciplines other than accounting.
d. places more emphasis on precision of data compared with financial accounting
which does not place more emphasis on accuracy of information.
3. Which of the following characteristics relate to financial accounting?

a. Reports are promptly prepared and submitted to preserve its usefulness.
b. Data may be both historical and estimates.
c. It must adhere to the generally accepted accounting principles.
d. It provides information needed by management in making decisions.
4. The formal report in management accounting is covered by the guidelines of

a. GAAP b. SEC c. Management d. PICPA
5. One major difference between financial and management accounting is that

a. financial accounting reports are prepared primarily for users external to the
company.
b. management accounting is not under the jurisdiction of the Securities and
Exchange Commission.
c. government regulations do not apply to management accounting.
d. all of the above are true.
6. Which type of authority do management accountants generally exercise?

a. functional b. company c. line d. staff
7. Line management includes

a. manufacturing managers. c. information-technology managers.
b. management-accounting managers. d. human resource managers.
8. Which of the following positions would most likely be a line manager?

a. personnel department manager c. treasurer
b. president d. purchasing department manager
9. All the following report to the CFO except the

a. controller c. production manager
b. tax department manager d. treasurer
10. The chief accounting officer of an organization is the

a. vice president of finance c. treasurer
b. internal auditor d. controller
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11. The chief management accountant called “controller” traditionally performs these
functions except
a. Relate to specific problems where expert help is required
b. The establishment and implementation of the financial planning process
c. Financial and management reporting and interpretation
d. Protection of company resources and economic evaluation
12. Which of the following is a controller’s responsibility?

a. Tax planning and accounting
b. Custodian of funds
c. In-charge of credit and collection
d. Arranging short-term loans and financing
13. Which of the following is not a controller’s function?

a. In-charge of planning and control
b. Arranging short-term financing
c. Protection of assets
d. Interpretation and reporting on effects of external factors on the business
14. Controllers are generally not concerned with

a. Reporting to government c. Preparation of tax returns
b. Protection of assets d. Investor relations
15. Which of the following is not a controllership function, as distinguished from a

treasury function?
a. reporting and interpreting c. protection of assets
b. credit and collection d. government reporting
Let’s Analyze
Activity 1. In this lesson, you have been oriented on the role of management
accountants in the business world and what are expected of them. Now I want to hear
your thoughts further.
1. If you become a management accountant, what do you think would be your role in
the organization that you will be joining? What principles and standards should you
observe to become an effective management accountant?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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2. Explain why having an ethical behavior important for a management accountant.

___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
In a Nutshell
Activity 1. CASE ANALYSIS
Amoranto, Inc. is a closely held brokerage firm that has been very successful over the
past five years, consistently providing most members of the top management group
with 50 percent bonuses. In addition, both the chief financial officer and the chief
executive officer have received 100 percent bonuses. Amoranto expects this trend to
continue.
Recently, the top management group of Amoranto, which holds 40 percent of the
outstanding shares of common stock, has learned that a major corporation is
interested in acquiring Amoranto. Amoranto’s management is concerned that this
corporation may make an attractive offer to the other shareholders and that
management would be unable to prevent the takeover. If the acquisition occurs, this
executive group is uncertain about continued employment in the new corporate
structure. As a consequence, the management group is considering changes to
several accounting policies and practices that, although not in accordance with
generally accepted accounting principles, would make the company a less attractive
acquisition. Management has told Pederico Casanova, Amoranto’s controller, to
implement some of these changes. Pederico has also been informed that Amoranto’s
management does not intend to disclose these changes at once to anyone outside
the immediate top management group.
Required:
Using the code of ethics for management accountants, evaluate the changes that
Amoranto’s management is considering, and discuss the specific steps that Pederico
Casanova should take to resolve the situation. (CMA adapted)
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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Q&A LIST
1.
2.
3.
4.
5.
KEYWORDS INDEX
Business Ethics Credibility Management Accountant
Certified Mgmt. Accountant Due Diligence Management Accounting
Chief Financial Officer Ethical Behavior Managerial Accounting
Competence Ethical Professional Practice Management Functions
Confidentiality Financial Accounting Objectivity
Conflict of Interest Full Disclosure Resolution of Ethical Conduct
Controller Institute of Mgmt. Accountants Staff Personnel
Controllership Integrity Standards of Ethical Conduct
Cost Accounting Line Personnel Treasurership
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Cost-Volume-Profit (CVP) Analysis
Big Picture in Focus: ULOc. Apply the cost-volume-profit analysis

in both single- and multiple-product settings.
Metalanguage
In this section, the most essential terms relevant to the study of cost-volume-
profit relationships and to demonstrate ULOc will be operationally defined to establish
a common frame of reference as to how the texts work in your chosen field or career.
You will encounter these terms as we go through this new lesson. Please refer to these
definitions in case you will encounter difficulty in understanding concepts.
1. CVP analysis. This refers to the management’s systematic study of the

relationships among costs, volume and profits.
2. Break-even analysis. This is an application of the CVP analysis.
3. Break-even point. This is the point of sales (in peso or unit) at which the company
neither makes a profit nor suffers a loss.
4. Variable costs. Items of cost which vary directly, in total, in relation to volume of
production
5. Fixed costs. Items of cost which remain constant in total, irrespective of the
volume of production.
6. Contribution margin. It is the excess of sales over variable costs.
7. Operating income. It denotes income or profit before income taxes.
8. Sales mix. It is the relative combination of products being sold by a firm.
9. Sensitivity analysis. This is conducted on CVP results to examine the sensitivity
of profits to changes in sales.
10. Margin of safety. This is one of the measures used in sensitivity analysis. It is the
excess of actual or budgeted sales over break-even sales; the amount of sales
that the company can afford to lose before an actual loss is incurred.
11. Operating leverage. This is another measure used in sensitivity analysis. It is the
use of fixed costs to extract higher percentage changes in profits as sales activity
changes.
12. Indifference point. It is the level of volume or revenues at which total costs, and
hence, profits, are the same under both cost structures (the relative proportions of
fixed and variable costs).
Essential Knowledge
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Managers are constantly faced with decisions about selling prices, variable costs
and fixed costs. To be able to choose from among alternative actions, it is necessary
to have a good estimate of the probable costs that would result from each choice.
Management needs to know the costs to be incurred under normal operating
conditions and how they might vary if conditions change. The cost-volume-profit
analysis is one of the most powerful tools that managers can utilize for this purpose.
Uses of Cost-Volume-Profit (CVP) Analysis

1. Planning, controlling and evaluation. Because CVP analysis emphasizes the
interrelationships of costs, quantity sold, and price, it brings together all of the
financial information of the firm. CVP analysis can be a valuable tool in identifying
the extent and magnitude of the economic trouble a company is facing and helping
pinpoint the necessary solution.
2. Decision-making. CVP analysis is a useful in decision-making activities covering

areas such as, but not limited to, the following:
a. Setting selling prices
b. Selecting the mix of products to sell
c. Choosing among marketing strategies
d. Analyzing the effects of changes in cost on profits
Short-run decisions: most frequently asked questions

1) How many units will be manufactured?
2) What is the company’s break-even sales?
3) Should the selling price be changed?
4) Should the company spend more on advertising?
5) What profit contribution can be realized if the organization performs as
expected for the period?
6) Should the product be sold as is or should it be processed further?
7) What would be the effects of the changes in the cost of materials and in the
efficiency of production?
Long-run decisions: such as buying a new plant and equipment also need
predictions of the resulting cost-volume-profit relationship
Significance of CVP Analysis

Helps managers understand the interrelationship between cost, volume and profit in
an organization by focusing on interactions between the following five elements:
1. Prices of products
2. Volume or level of activity within relevant range
3. Variable cost per unit
4. Total fixed costs
5. Mix of products sold
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Assumptions and Limitations
To give you a heads-up, below are some underlying assumptions upon which
the CVP analysis rests which place definite limitations on the conclusions which can
be drawn from its results. Whenever these underlying assumptions do not correspond
to a given situation, the limitations of the analysis must be clearly recognized if the
break-even tool is to be useful.
1. The analysis is valid only within the relevant range in a limited period of time.
2. All costs can be categorized as fixed or variable.
3. Variable costs change proportionately with volume (linear rate).
4. Fixed costs are constant within the relevant volume range.
5. Selling prices do not change as sales volume changes.
6. For multi-products, the sales mix remains constant.
7. Productive efficiency does not change.
8. Inventory levels remain constant (i.e. in physical units, sales equals production).
9. Volume is the only relevant factor affecting costs and revenues.
CVP ANALYSIS: BREAK-EVEN PLANNING

The starting point in many business plans is determining the break-even point.
Break-even point (BEP) is the level of sales volume where:

Total Revenues = Total Expenses, thus, operation results to: NO PROFIT / NO
LOSS
BEP Planning Methods:

1. Operating Income approach;
2. Contribution Margin approach; and,
3. Graphical approach
Operating Income Approach (Equation Method)

This approach focuses on the income statement as a useful tool in organizing the
firm’s costs into fixed and variable categories. The income statement can be
expressed as an:
Equation
Sales xxx
Variable Costs (xxx)
Contribution Margin xxx
Fixed Costs (xxx)
Operating Income xxx
At Break-even Point:
Break-even Sales = Variable Costs + Fixed Costs
Break-even Sales = Total Costs
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Contribution Margin Approach (Formula Method)

This approach is a refinement of the operating income approach. In effect, we are
simply recognizing that:
at break-even: Total Contribution Margin = Total Fixed Costs
Contribution Margin per unit (CMPU) or marginal income per unit is the excess of unit
selling price over unit variable cost; the amount each unit sold contributes towards
o covering fixed costs
o providing operating profits
Formula
Unit Selling Price xxx
Less: Unit Variable Cost (xxx)
Contribution Margin per unit xxx
Contribution Margin ratio (CMR) is the percentage of contribution margin to total sales;
shows how CM will be affected by a given peso change in total sales
Formula
Contribution Margin ratio = Contribution Margin
Sales
Example:
If CMR = 40%, this means that
o for each peso increase in sales, total CM will increase by P0.40
o net income will increase by P0.40 assuming that there are no changes in the
fixed costs
At Break-even Point:
Break-even point (units) = Total Fixed Cost
CM per unit
Break-even point (peso) = Total Fixed Cost

CM ratio
Graphical Approach
Visual portrayals may further our understanding of CVP relationships. A graphical
representation can help managers see the difference between variable cost and
revenue. It may also help managers understand quickly what impact an increase or
decrease in sales will have on the break-even point.
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Under this approach, sales revenue, variable costs and fixed costs are plotted
on the vertical axis while volume is plotted on the horizontal axis of the cost-volume-
profit graph, also known as the break-even chart, as shown in Fig. 3. The break-even
point is the point where the total sales revenue line intersects the total cost line.
C-V-P Graph highlights the CVP

relationships over a wide range of
activity and gives managers a
perspective that can be obtained in no
other way.
Figure 3.
Cost-Volume-Profit Graph
The break-even chart can be shown in a much simpler form in Fig. 4. Unlike the
CVP graph, the profit-volume graph does not show the total cost and sales lines.
Instead, it illustrates a profit line drawn on a graph with volume (in units and in pesos)
in the horizontal axis and profit/loss in the vertical axis.
P-V Graph focuses on profitability;

highlights only the difference between
total sales revenue and total costs;
enables managers to more easily
determine the operating P/L for
various levels of operation
Figure 4.
Profit-Volume Graph
For our purpose, we will not anymore delve too much into this approach. It is
enough to take note of the highlights of the two graphs.
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CVP ANALYSIS: REVENUE AND COST PLANNING

- determining the level of sales needed to achieve a desired level of profit
Sales (units) = Total Fixed Cost + Desired Profit

CM per unit
Sales (pesos) = Total Fixed Cost + Desired Profit

CM ratio
Illustration (2-1): Breakeven Analysis (adapted)

The Income Statement for one of the CostMan Company’s product shows:
Sales (100 units at P100 a unit) P10,000
Cost of Goods Sold:
Direct Labor P1,500
Direct Materials Used 1,400
Variable FOH 1,000
Fixed FOH 500 4,400
Gross Profit P 5,600
Marketing Expenses
Variable 600
Fixed 1,000
Administrative Expenses
Variable 500
Fixed 1,000 3,100
Operating Income P 2,500
Required:
1. Compute the BEP in units and in pesos.
2. If sales increase by 25%, how much will be the new operating income?
3. Compute the new BEP in pesos if fixed FOH will increase by P1,700.
Solution:
1. BEP in units and in pesos
Fixed Costs (FC) = 500 + 1,000 + 1,000 = P2,500
Variable Costs (VC) = 1,500 + 1,400 + 1,000 + 600 + 500 = P5,000
a. Using Operating Income Approach

Equation
Selling Price P10,000 /100 units P100
VC per unit 5,000 /100 units (50)
CM per unit (CMPU) P 50
Let BEP (units) = x = number of units to be sold at break-even

BEP Sales = Fixed Costs + Variable Costs
P100x = P2,500 + P50x
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BEP (units) = x = P2,500/P50 = 50 units

BEP (pesos) = P100 x 50 units = P5,000
Income Statement:
Sales P100 x 50 units P5,000
Variable Costs P50 x 50 units (2,500)
Contribution Margin P50 x 50 units P2,500
Fixed Costs constant in total regardless of volume (2,500)
Operating Income P -0-
b. Using Contribution Margin Approach

Formula
CMPU = P5,000 / 100 units = P50
BEP (units) = Total FC = P2,500 = 50 units

CMPU P50
CMR = CM = P 5,000 = 0.50 = 50%

Sales P10,000
BEP (pesos) = Total FC = P2,500 = P5,000

CMR 50%
2. Incremental units = 100 units x 25% = 25 units

Current Operating Income P2,500
Add:
Incremental Contribution Margin
P50 x 25 units 1,250
Operating Income P3,750
3. BEP (pesos) = Total FC + additional FC = P2,500 + P1,700 = P8,400

CMR 50%
To immediately apply your new knowledge, proceed to answering ULOc Let’s

Analyze Activity 1 Problem 1.
Illustration (2-2): CVP Analysis with Changes in Cost Structure

(adapted)
The FinAct Company sold 100,000 units of its product at P20 per unit. Variable costs
are P14 per unit (manufacturing costs of P11 and marketing costs of P3). Fixed costs
are incurred uniformly throughout the year and amount to P792,000 (manufacturing
costs of P500,000 and marketing costs of P292,000).
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Required:
2. Number of units that must be sold to earn an income of P60,000 before
income tax
3. Number of units that must be sold to earn an after-tax income of P90,000.
Income tax rate is 40%.
4. Number of units required to break-even if there is a 10% increase in wages
and salaries. Labor cost constitutes 50% of variable costs and 20% of fixed
costs.
Solution:
Fixed Costs (FC) = P792,000
Variable Costs (VC) = P 14 x 100,000 units = P1,400,000
a. Using Operating Income Approach

Equation
Selling Price P20
VC per unit (14)
CM per unit (CMPU) P6
Let BEP (units) = x = number of units to be sold at break-even

BEP Sales = Fixed Costs + Variable Costs
P20x = P792,000 + P14x
BEP (units) = x = P792,000/P6 = 132,000 units
BEP (pesos) = P20 x 132,000 units = P2,640,000
Income Statement:
Sales P20 x 132,000 units P2,640,000
Variable Costs P14 x 132,000 units (1,848,000)
Contribution Margin P 6 x 132,000 units P 792,000
Fixed Costs constant in total regardless of volume ( 792,000)
Operating Income P -0-
b. Using Contribution Margin Approach

Formula
CMPU = P20 – P14 = P6
BEP (units) = Total FC = P792,000 = 132,000 units
CMPU P6
CMR = CM = P6 = 0.30 = 30%
Sales P20
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BEP (pesos) = Total FC = P792,000 = P2,640,000

CMR 30%
2. Sales (units) = Total FC + Desired Profit = P792,000 + P60,000 = 142,000 units
CMPU P6
3. Sales (units) = Total FC + Desired Profit = P792,000 + P150,000 = 157,000 units
CMPU P6
Desired Profit = Income before tax = P90,000 / 60% = P150,000
4. BEP (units) = Total FC = P792,000 + [(20% x P792,000) x 10%] = 152,423 units
CMPU P5.30
Selling Price P20.00
VC per unit:
Materials, OH and marketing 50% x P14 P7.00
Labor 50% x P14 x 110% 7.70 (14.70)
CM per unit (CMPU) P 5.30

For multiple products:

Break-even Sales = Total Fixed Cost
(combined units) Weighted CM per unit
(Unit CM x Qty. per mix) + (Unit CM x Qty. per mix)

Weighted CM per unit = of product A of product B
Total Number of Units per Sales Mix
Sales Mix – relative combination of products
Break-even Sales = Total Fixed Cost

(combined pesos) Weighted CM ratio
Weighted CM ratio = Total Weighted CM (pesos)

Total Weighted Sales (pesos)
Illustration (2-3): Multiple-Product Firm (adapted)

ABS, Inc. produces only two products, X and Y. These account for 60% and 40% of
the total sales pesos of ABS, respectively. Variable costs as a percentage of sales
pesos are 60% for X and 85% for Y. Total fixed costs are P150,000. There are no
other costs.
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Required:
1. Weighted contribution margin ratio
2. BEP in sales pesos (combined)
3. Sales pesos necessary to generate a net income of P9,000 if total fixed costs
will increase by 30%
Solution:
1. Weighted contribution margin ratio (CMR)
X Y
Selling Price 100% 100%
Variable Costs 60% 85%
Contribution Margin ratio 40% 15%
Sales Mix ratio 60% 40%

Multiply by: CMR 40% 15%
Weighted CMR 24% + 6% = 30%

Break-even Sales = Total Fixed Cost = P150,000 = P500,000
(combined pesos) Weighted CM ratio 30%
3. Desired net income P 9,000

Add: Total fixed costs P150,000 x 130% 195,000
Contribution margin P204,000
Divided by weighted CMR 30%
Sales necessary to generate desired net income P680,000
Sales P204,000 / 30% P680,000

Variable Costs ( 142,800)
Contribution Margin P204,000
Fixed Costs P150,000 x 130% ( 195,000)
Operating Income P 9,000

Illustration (2-4): Multiple-Product Firm (adapted)

The CBN Corp. sells two products, D and W at a rate of 2 units and 3 units
respectively. The following data are available:
D W
Unit Selling Price P10 P5
Unit Variable Costs P6 P3
Total Fixed Costs P420,000
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Required:
1. Weighted contribution margin per unit
2. BEP in units (combined)
3. Weighted contribution margin ratio
5. BEP in sales pesos for: a) Product D b) Product W
Solution:
1. Weighted contribution margin per unit (CMPU)
D W
Selling Price P10 P5
Variable Costs 6 3
Contribution Margin per unit P 4 P2
Sales Mix ratio 2/5 3/5

Multiply by: CMPU P 4 P 2
Weighted CMPU P1.60 + P1.20 = P2.80
2. BEP in units (combined)

Break-even Sales = Total Fixed Cost = P420,000 = 150,000 units
(combined units) Weighted CMPU P2.80
3. Weighted contribution margin ratio (CMR)

D W
Selling Price P10 P5
Variable Costs 6 3
Contribution Margin per unit P 4 P2
Contribution Margin ratio 40% 40%
Sales Mix ratio 2/5 3/5

Multiply by: CMR 40% 40%
Weighted CMR 16% + 24% = 40%

Break-even Sales = Total Fixed Cost = P420,000 = P1,050,000
(combined pesos) Weighted CM ratio 40%
5. BEP in sales pesos for:

Product D
P1,050,000 x P1.60 = P600,000
P2.80
Product W
P1,050,000 x P1.20 = P450,000
P2.80
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Risks and Uncertainties

An important assumption of CVP analysis is that prices and costs are known with
certainty. But in reality, this is not always the case. Risk and uncertainty are in a
tandem in business decision making and must be dealt with accordingly.
How do managers deal with risk and uncertainty? A variety of methods may be
used. Managers may engage in sensitivity or what-if analyses. Two concepts useful
to management in sensitivity analysis are margin of safety and operating leverage.
Both are considered measures of risk that requires knowledge of fixed and variable
costs.
SENSITIVITY ANALYSIS OF CVP RESULTS

-examining the sensitivity of profits to changes in sales, either of the measures
may be used:
a. Margin of Safety – potential effect of the risk that sales will fall short of planned
levels
b. Operating Leverage – potential effect of the risk that sales will fall short of
planned levels as influenced by the relative proportion of fixed to variable
manufacturing costs
Margin of Safety
–amount of sales that the company can afford to lose before a loss is incurred,
computed as:
Margin of Safety = Actual or Planned Sales - BEP
(excess of sales over the break-even point)
The margin of safety (MS) can be viewed as a crude measure of risk. There are
always events, unknown when plans are made, that can lower sales below the original
expected level. If a firm’s margin of safety is large given the expected sales for the
coming year, the risk of suffering losses should sales take a downward turn is less
than if the margin of safety is small. Managers who face a low margin of safety may
wish to consider actions to increase sales or decrease costs.
The margin of safety can also be used as a ratio, a percentage of sales as
follows:
Margin of Safety ratio = Margin of Safety
Actual or Planned Sales
The margin of safety ratio (MSR) is useful for comparing the risk of two alternative
products, or for assessing the riskiness in any given product. The product with a
relatively low margin of safety ratio is the riskier of the two products and therefore
usually requires more of management’s attention.
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Illustration (2-5): Margin of Safety (adapted)

Miraflor Manufacturing Company’s budget for the coming year revealed the following
unit data:
Budgeted net income for the year P875,000
Unit Selling Price P50
Unit Costs:
Variable Fixed
Manufacturing Cost P14 P12
Selling Cost P2.50 P5.50
General Cost P0.25 P7
Required:
1. Determine the budgeted sales volume in units and in pesos.
2. Determine the margin of safety in units and in peso.
3. Determine the margin of safety percentage.
Solution:
1. Budgeted sales volume (units) = Total Budgeted net income = P875,000 = 100,000 units
Net income per unit P8.75
Budgeted sales (pesos) = 100,000 units x P50 = P5,000,000

Selling Price P50
Variable Cost per unit P16.75
Contribution Margin per unit P33.25 66.5% of sales
Fixed Cost per unit P24.50
Net income per unit P 8.75
Variable Fixed
Manufacturing Cost P14 P12
Selling Cost P2.50 P5.50
General Cost P0.25 P7
Unit Cost P16.75 P24.50
2. MS (pesos) = Budgeted Sales – BEP = P5,000,000 – P3,684,211 = P1,315,789

MS (units) = Budgeted Sales – BEP = 100,000 – 73,684 = 26,316 units
BEP (pesos) = Total FC = P24.50 x 100,000 units = P3,684,211

CMR 66.5%
BEP (units) = Total FC = P24.50 x 100,000 units = 73,684 units
CMPU P33.25 per unit
3. Margin of Safety ratio = Margin of Safety (pesos) = P1,315,789 = 26%

Actual or Planned Sales P5,000,000

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Operating Leverage
– principle by which management with a relatively high contribution margin can
increase profits substantially with a small increase in sales volume
In financial terms, operating leverage is concerned with the relative mix of fixed
costs and variable costs in an organization. Sometimes fixed costs can be traded-off
for variable costs. As variable costs decrease, the unit contribution margin increases,
making the contribution of each unit sold greater. This increases the effect of
fluctuations in sales on profitability. Thus, firms that have lowered variable costs by
increasing the proportion of fixed costs will benefit with greater increases in profits as
sales increase than will firms with a lower proportion of fixed costs. In this case, fixed
costs are being used as leverage to increase profits. Unfortunately, though, firms with
higher operating leverage will also experience greater reductions in profits as sales
decrease.
Operating leverage is the use of fixed costs to extract higher percentage

changes in profits as sales activity changes. The greater the degree of operating
leverage, the more that changes in sales activity will affect profit. Because of this
phenomenon, the mix of costs that an organization chooses can have a considerable
influence on its operating risk and profit level.
Degree of Operating Leverage (DOL) – change in operating income (EBIT) resulting

from a percentage change in sales; the unchanging fixed costs are used as a lever to
increase profits; for every increase in sales, profit will increase n th times
DOL = Contribution Margin = 1/MSR

Profit
DOL = Percentage change in operating income
Percentage change in sales
Example: if DOL = 5, this means

for every increase/decrease in sales, profit will increase/decrease 5 times in %
If fixed costs are used to lower variable costs such that contribution margin
increases and profit decreases, then the degree of operating leverage increases—
signaling an increase in risk.
The greater the DOL, the greater the risk of loss when sales decline but the
greater the reward when sales increase.
Illustration (2-6): Operating Leverage (adapted)
Below is an income statement of two competing companies in the microtel industry:
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Microtel A Microtel B
Amount % of Sales Amount % of Sales
Sales P100,000,000 100% P100,000,000 100%
Variable Costs P 60,000,000 60% P 30,000,000 30%
CM P 40,000,000 40% P 70,000,000 70%
Fixed Costs P 30,000,000 P 60,000,000
Net Income P 10,000,000 P 10,000,000
Required:
1. Calculate the operating leverage of each company. If sales increase, which
company benefits more? How do you know?
2. Assume sales rise 10% in the next year. Calculate the percentage increase in
profit for each company. Are the results what you expected?
Solution:
1. Degree of operating leverage = Contribution Margin
Profit
Microtel A:
Degree of operating leverage = P40,000,000 = 4
P10,000,000
Microtel B:
Degree of operating leverage = P70,000,000 = 7
P10,000,000
Microtel B will benefit more if sales increase because of a higher DOL. Microtel B has a
higher proportion of fixed costs in relation to variable costs, therefore it has a higher
operating leverage than does Microtel A. The degree of operating leverage is a measure,
at a specific level of sales, of how a percentage change in sales volume will affect profits.
The higher the operating leverage, the more sensitive profits are to changes in sales
volume.
Remember, however, that even though a higher DOL can mean a greater reward when
sales increase, it could also bring in greater risk of loss when sales decline.
2. Microtel A Microtel B
Amount % of Sales Amount % of Sales
Sales P110,000,000 100% P110,000,000 100%
Variable Costs P 66,000,000 60% P 33,000,000 30%
CM P 44,000,000 40% P 77,000,000 70%
Fixed Costs P 30,000,000 P 60,000,000
Net Income P 14,000,000 P 17,000,000
Microtel A:
Change in profits = P14,000,000 – P10,000,000 = 40%
P10,000,000
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Microtel B:
Change in profits = P17,000,000 – P10,000,000 = 70%
P10,000,000
Yes, these results are what we expected. Operating leverage indicates what change in net
income can be expected from a change in sales volume. An operating leverage of 4 implies
that the change in net income will be 4 times as large as the change in sales volume.
Therefore, if sales increased by 10%, net income should increase by 40%. This is precisely
what happened. The same logic applies to Microtel B.

Indifference Point
– level of volume or revenues at which total costs, and hence profits, are the same
under both cost structures (relative proportions of fixed and variable costs)
If the company is operating at that level of volume, which alternative to use would
not matter because income would be the same either way. Because selling price is
the same under both alternatives and total costs are the same, profits will be the same.
The indifference point is calculated by setting up an equation where each side

represents total costs under both alternatives.
Alternative A Alternative B
VC + FC = VC + FC
At unit volumes below the indifference point, the alternative with lower fixed costs
gives higher profits. At volumes above the indifference point, the alternative with higher
costs is more profitable.
Illustration (2-7): Indifference Point (adapted)

Flores Company sells a product for P20, variable costs are P8 per unit, and fixed costs
are P32,000.
Required:
1. What is Flores’ break-even point in units?
2. Find the selling price that Flores must charge to earn an P8,000 profit selling
1,600 units.
3. Flores is considering new equipment that would increase fixed costs by
P2,000 while reducing unit variable costs by P1.60 per unit. Find the sales
level where Flores is indifferent between the two costs structures.
Solution:
1. BEP (units) = Total Fixed Costs = P32,000 = 2,667 units
CMPU P20 – P8
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2. Profit = Sales – VC – FC
P8,000 = 1,600x – (1,600 x P8) – P32,000
Let x = selling price = P33
3. Current costs = Proposed costs

P32,000 + P8Q = P34,000 + P6.40Q
Let Q = indifference point in sales unit = 1,250 units

Let’s Check
Provide a solution whenever necessary to derive the answer.
1. Cost-volume profit analysis includes some underlying assumptions. Which of the
following is not one of these assumptions?
a. Cost and revenues are predictable.
b. Cost and revenues are linear over the relevant range
c. Changes in beginning and ending inventory levels are insignificant in amount.
d. Sales mix changes are irrelevant.
2. The term relevant range, as used in cost accounting, means the range
a. over which costs may fluctuate.
b. over which cost relationships are valid.
c. of probable production.
d. over which production has occurred in the past ten years.
3. Cost-volume-profit analysis is used primarily by management
a. as a planning tool.
b. for control purposes.
c. to prepare external financial statements.
d. to attain accurate financial results.
4. Cost-volume-profit analysis assumes all of the following EXCEPT

a. all costs are variable or fixed.
b. units manufactured equal units sold.
c. total variable costs remain the same over the relevant range.
d. total fixed costs remain the same over the relevant range.
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5. In CVP analysis, when the number of units changes, which one of the following
will remain the same?
a. Total sales revenues c. Total fixed costs
b. Total variable costs d. Total contribution margin
6. The contribution income statement

a. reports gross margin.
b. is allowed for external reporting to shareholders.
c. categorizes costs as either direct or indirect.
d. can be used to predict future profits at different levels of activity.
7. The contribution income statement highlights

a. gross margin
b. product costs and period costs
c. different product lines
d. variable and fixed costs
8. In CVP analysis, focusing on target net income rather than operating income
a. will increase the breakeven point.
b. will decrease the breakeven point.
c. will not change the breakeven point.
d. does not allow calculation of breakeven point.
9. The breakeven point decreases if

a. the variable cost per unit increases.
b. total fixed costs decrease.
c. the contribution margin per unit decreases.
d. the selling price per unit decreases.
10. In multiproduct firms, when sales mix shifts toward the product with the highest
contribution margin then
a. total revenues will decrease
b. breakeven quantity will increase
c. total contribution margin will decrease
d. operating income will increase
11. It is the process of varying key estimates to identify those estimates that are the
most critical to a decision.
a. The graph method
b. A sensitivity analysis
c. The degree of operating leverage
d. Sales mix
12. The margin of safety is the difference between

a. budgeted expenses and breakeven expenses
b. budgeted revenues and breakeven revenues
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c. actual operating income and budgeted operating income

d. actual contribution margin and budgeted contribution margin
13. The percentage change in earnings before interest and taxes associated with the
percentage change in revenues is the degree of
a. operating leverage c. breakeven leverage
b. financial leverage d. combined leverage
14. In a company with low operating leverage

a. fixed costs are high and variable costs are low.
b. large changes in sales volume result in small changes in net income.
c. there is a higher possibility of net loss than a higher-leveraged firm.
d. less risk is assumed than in a highly leveraged firm.
15. The indifference point is the level of volume at which a company

a. earns the same profit under different operating schemes.
b. earns no profit.
c. earns its target profit.
d. any of the above.
Let’s Analyze
Activity 1. Below are problems that will test your basic understanding of the CVP
analysis. Read, analyze and provide the required information.
Problem 1 (adapted)
Davao Company sells its only product at P30 per unit. Variable costs are P22 per unit
and fixed costs are P100,000 per month.
Required: Treat each question independently from the others.
1. If Davao can sell 15,000 units in a particular month, what will be its income?
2. What is the break-even point in units?
3. What is the break-even point in pesos?
4. What unit sales are required to earn P50,000 for the month?
5. What sales, in pesos, are required to earn P50,000 for the month?
6. Suppose Davao reduces its selling price to P28 because competitors are
charging that amount. What is its new break-even point (a) in units and (b) in
pesos?
7. Suppose that fixed costs are expected to increase by P10,000 per month and
price remains at P30. What is the new break-even point (a) in units and (b) in
pesos?
8. Suppose Davao is currently selling 10,000 units per month. The marketing
manager believes that sales would increase if advertising were increased by
P5,000. How much would sales have to increase, in units, to give Davao the
same income or loss that it is currently earning? (Although, you know how many
units are now being sold, you do not need this fact to solve the problem.)
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Problem 2 (adapted)
Forbes Company’s product sells for P16 and has a variable cost per unit of P12. Fixed
costs are P120,000.
Required:
1. Compute the break-even point in pesos.
2. Compute the number of units required to earn a P30,000 profit.
3. Forbes has a target profit of P36,000 and expects to sell 30,000 units.
Compute the selling price Forbes must charge to earn the target profit.
4. Forbes wants to keep its selling price at P16 per unit and earn a 10% return
on sales. Calculate the number of units Forbes must sell to meet the target.
Problem 3 (adapted)
Cagayan Company sells three products. Planned results for next year are as follows:
A B C
Unit Selling Price P10 P8 P4
Unit Variable Costs P4 P6 P1
Sales Mix in pesos 25% 25% 50%
Total Fixed Costs P500,000
Required:
1. Compute the weighted contribution margin percentage.
2. Compute the sales in pesos required to earn a P100,000 profit.
3. Supposed now that the sales mix, in units, is 25%, 25%, 50%. Determine the
weighted contribution margin per unit.
4. Determine the total unit sales needed to earn a P100,000 profit.
Problem 4 (adapted)
Park Company markets two computer games: Ping and Pong. A contribution format
income statement for a recent month for the two games appears below:
Ping Pong Total
Sales P100,000 P50,000 P150,000
Variable expenses 25,000 5,000 30,000
Contribution margin P 75,000 P45,000 P120,000
Fixed expenses 90,000
Net operating income P 30,000
Required:
1. Compute the overall contribution margin ratio.
2. Compute the overall break-even point for the company in sales pesos.
3. Verify the overall break-even point for the company by constructing a
contribution format income statement showing the appropriate levels of sales
for the two products.
Let’s Analyze
Activity 2. Now, it’s your turn to apply the sensitivity analysis on CVP results.
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Problem 1 (adapted)
Abigail Corporation is a distributor of a sun umbrella used at resort hotels. Data
concerning the next month’s budget appear below:
Selling Price P25 per unit
Variable expense P15 per unit
Fixed expense P8,500 per month
Unit sales 1,000 units per month
Required:
1. Compute the company’s margin of safety.
2. Compute the company’s margin of safety as a percentage of its sales.
Problem 2 (adapted)
Victoria Company sells a single product. The company’s sales and expenses for a
recent month follow:
Total Per Unit
Sales P600,000 P40
Less: variable expenses 420,000 28
Contribution margin P180,000 P12
Fixed expense 150,000
Net operating income P 30,000
Required:
1. What is the monthly break-even point in units sold and in sales pesos?
2. Without resorting to computations, what is the total contribution margin at the
break-even point?
3. How many units would have to be sold each month to earn a minimum target
profit of P18,000? Use the contribution method. Verify your answer by
preparing a contribution income statement at the target level of sales.
4. Refer to the original data. Compute the company’s margin of safety in both
peso and percentage terms.
5. What is the company’s CM ratio?
6. If monthly sales increase by P80,000 and there is no change in fixed
expenses, by how much would you expect monthly net operating income to
increase?
Problem 3 (adapted)
Davao Company sells its only product at P30 per unit. Variable costs are P22 per unit
and fixed costs are P100,000 per month.
Required:
1. Suppose Davao is selling 20,000 units per month at P30. What is its margin of
safety (a) in units and (b) in pesos?
2. Suppose Davao is selling 20,000 units per month at P30. What is the degree of
operating leverage?
3. Davao currently pays its salespeople salaries that total to P40,000 per month,
but no commissions. The vice president for sales is considering a plan whereby
the salespeople would receive a 5 percent commission, but their salaries would
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fall to a total of P25,000 per month (a drop of P15,000). At what sales level is
the company indifferent between the two compensation plans?
In a Nutshell
Activity 1. COMPREHENSIVE PROBLEM ON CVP ANALYSIS (DCCPAR adapted)
GCQ Company is a small but growing manufacturer of telecommunications

equipment. The company has no sales force of its own. Rather, it relies completely
on independent sales agents to market its products. These agents are paid a
commission of 15% of selling price for all items sold. Inday, GCQ’s controller, has just
prepared the company’s budgeted income statement for next year. The statement
follows:
GCQ Company
Budgeted Income Statement
For the year ended December 31
Sales P16,000,000
Less: Manufacturing Costs
Variable 7,200,000
Fixed overhead* 2,340,000 9,540,000
Gross Profit P 6,460,000
Less: Operating Expenses
Marketing Expenses
Commissions to agents 2,400,000
Fixed marketing costs 120,000 2,520,000
Fixed Administrative Expenses 1,800,000
Operating Income P 2,140,000
Less: Fixed Interest Cost 540,000
Income before income taxes 1,600,000
Less: Income Tax (30%) 480,000
Net Income P 1,120,000
*primarily depreciation on storage facilities
As Inday handed the statement to Rody, GCQ’s president, she commented, “I went
ahead and used the agents’ 15% commission rate in completing these statements,
but we’ve just learned that they refuse to handle our products next year unless we
increase the commission rate to 20%.”
“That’s the last straw,” Rody replied angrily. “Those agents have been demanding
more and more. This time they’ve gone too far. How can they possibly defend a 20%
commission rate?”
“They claim that after paying for advertising, travel, and other costs of promotion,
there’s nothing left over for profit,” replied Inday.
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“I say it’s just plain robbery,” retorted Rody. “And I also say it’s time we dump those
guys and get our own sales force. Can you get your people to work up some cost
figures for us to look at?”
“We’ve already worked them up,” said Inday. “Several companies we know about pay
a 7.5% commission to their own salespeople, along with a small salary. Of course, we
would have to handle all promotion costs, too. We figure our fixed costs would
increase by P2,400,000 per year, but that would be more than offset by the
P3,200,000 (20% x P16,000,000) that we would avoid on agent’s commissions.”
The breakdown of the P2,400,000 cost figure follows:

Salaries
Sales manager P 100,000
Sales persons 600,000
Travel and entertainment 400,000
Advertising 1,300,000
Total P2,400,000
“Super,” replied Rody. “And I note that the P2,400,000 is just what we’re paying the
agents under the old 15% commission rate.”
“It’s even better than that,” explained Inday. “We actually save P75,000 a year
because that’s what we’re having to pay the auditing firm now to check out the agents’
reports so our overall administrative costs would be less.”
“Pull all of these number together and we’ll show them to the executive committee
tomorrow,” said Rody. “With the approval of the committee, we can move on the matter
immediately.”
Required:
1. What is the breakeven point in pesos for next year assuming that the agent’s
commission rate remains unchanged at 15%?
2. What is the breakeven point in pesos for next year assuming that the agent’s
commission rate is increased to 20%?
3. What is the breakeven point in pesos for next year if the company employs its
own sales force?
4. Assume that GCQ Company decides to continue selling through agents and
pays the 20% commission rate. What would be the volume of sales that would
be required to generate the same net income as contained in the budgeted
income statement for next year?
5. What is the volume of sales at which net income would be equal regardless of
whether GCQ Company sell through agents (at a 20% commission rate) or
employs its own sales force?
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Q&A LIST
1.
2.
3.
4.
5.
KEYWORDS INDEX
Break-even Analysis CVP Graph Operating Income Approach
Break-even Chart Degree of Operating Leverage Operating Leverage
Break-even Point Fixed Cost PV Graph
Break-even Planning Graphical Approach Risks and Uncertainties
Contribution Margin Indifference Point Sales Mix
Contribution Margin Approach Margin of Safety Sensitivity Analysis
Contribution Margin per unit Margin of Safety Ratio Single-Product Firms
Contribution Margin Ratio Multiple-Product Firms Variable Costs
CVP Analysis Operating Income Weighted CMR
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Absorption vs. Variable Costing
Big Picture in Focus:

ULOd. Discuss the difference between absorption and variable
costing.
ULOe. Prepare income statement using absorption and variable
costing.
ULOf. Reconcile absorption costing income with variable costing
income.
Metalanguage
In this section, the most essential terms relevant to the study of budgeting for
planning and control and to demonstrate ULOd-f will be operationally defined to
establish a common frame of reference as to how the texts work in your chosen field
or career. You will encounter these terms as we go through this new lesson. Please
refer to these definitions in case you will encounter difficulty in understanding
concepts.
1. Absorption Costing. This is an inventory costing method which treats fixed

factory overhead as a product cost.
2. Variable Costing. This is an inventory costing method which treats fixed factory
overhead as a product cost.
3. Predetermined Overhead Rate. It is the application rate used in assigning
overhead to work-in-process in absorption costing.
4. (Idle) Capacity Variance. It is a part of the total volume variance which arises
when the actual production differs from the capacity used in computing for the
predetermined overhead rate.
5. Normal capacity. It is the average level of production based on the company’s
past experience.
6. Budgeted capacity. It the expected level of production based on company’s sales
budget and inventory requirements.
7. Practical Capacity. It is the maximum capacity of the company’s resources
adjusted for errors and allowance for production stoppage due to repair and
maintenance, machine downtimes, electricity outage and the likes.
8. Ideal/Theoretical Capacity. It is the maximum level of production possible.
Essential Knowledge
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Let start this by discussing the different methods of presenting financial reports,
most especially the income statement. It was already introduced to you the difference
between Financial Accounting and Management Accounting during your ACC123
subject but to give you a quick refresh, Financial Accounting is basically geared
towards to common needs of a wide range of users or external reporting. Since users
include external parties, it is required to follow accounting standards and the generally
accepted accounting principles (GAAP) to ensure fairness of reported information. On
the other hand, Management Accounting is made for the use of management or what
we call “internal users”, therefore, information processing and communicating is called
“internal reporting” and information are processed based on its relevance to the
decision being made. Since management requires a different structure of information,
this results in having different inventory costing methods that affect inventory account
in the balance sheet and the cost of goods sold in the income statement. Also, the way
the income statement is arranged differs. We will talk more about this later.
These two methods of inventory costing are called Absorption Costing (Full
Costing) and Variable Costing (Direct Costing). Absorption Costing, which we do
in financial accounting, treats all manufacturing costs as inventoriable. As such, even
fixed manufacturing cost is attached on a per unit to each inventory, meaning it enters
first the balance sheet through the inventory account before it enters the income
statement when the units are sold. In addition to that, the income statement in
absorption costing is in a functional classification, meaning, costs are presented based
on its function, whether it relates to production (cost of goods sold), administration
(administrative expenses), selling the product(selling expenses) or obtaining financial
capital(finance cost).
Variable Costing, on the other hand, recognizes fixed factory overhead as a period
cost, meaning, it is an expense during the period it is incurred, as a result, only variable
manufacturing costs are considered as product cost. It argues that fixed overhead
could not be a product cost because such cost is not caused by production since
companies incur fixed overheads whether or not they manufacture any product.
Another point is that fixed overhead does not vary with activity level and is therefore
irrelevant for most of the management decisions relating to a product. Income
statement under variable costing classifies cost according to its behavior and
therefore, variable costs are separated from the fixed. This is also called the
contribution margin income statement.
See illustrations below for the differences between the two in cost flow, product cost,
and income statement.
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COST FLOW IN ABSORPTION COSTING COST FLOW IN VARIABLE COSTING
Direct Materials Direct Materials Variable Selling and

Variable Selling and
Admin Cost Admin Cost
Direct Labor Direct Labor
Fixed Selling and
Variable FOH Fixed Selling and Variable FOH Admin Cost
Admin Cost
Fixed FOH Fixed FOH
Balance Sheet Income Statement Balance Sheet Income Statement
Selling and Admin Selling and Admin

Work-in-process Work-in-process
Cost Cost
Finished Goods Cost of Goods Finished Goods Cost of Goods

Sold Sold
ABSORPTION COSTING VARIABLE COSTING
Direct Materials xx Direct Materials xx

Direct Labor xx Direct Labor xx
Variable Factory Overhead xx Variable Factory Overhead xx
Fixed Factory Overhead xx Product Cost xx
Product Cost xx
ABSORPTION COSTING INCOME STATEMENT VARIABLE COSTING INCOME STATEMENT

(aka Contribution Margin IS)
Sales xx
Cost of Goods Sold xx Sales xx
Gross Profit xx Variable Manufacturing Cost xx
Selling and Administrative expenses xx Product Contribution Margin xx
Operating Income xx Variable Selling and Admin. Expenses xx
Contribution Margin xx
Fixed Costs xx
Operating Income xx
Of course, because of the mentioned differences in term of product costing, these two
arrives with different operating income depending on their units sold and produced.
Example: Haidee&Hazel Co. is in the business of manufacturing stuffed toys called

“Mimi”. Their first year was quite good and therefore they decided to continue. They
produced the same amount and worked on advertising during the second year. Sales
and production information are provided below:
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1st 2nd 3rd

Production in unit 35,000 35,000 35,000
Sales in units 29,000 41,000 35,000
Selling Price Php 300
Direct Materials 85
Direct Labor 25
Variable Factory Overhead 50
Fixed Factory Overhead 1,400,000
Variable Selling and Administrative Expenses 15
Fixed Selling and Administrative Expenses 1,600,000
Haidee, the CEO requested you, his management accountant, to prepare the income
statement both in Absorption Costing and Variable Costing format for the first three
years of operation and present a reconciliation for any difference.
Direct Materials 85 Direct Materials 85

Direct Labor 25 Direct Labor 25
Variable Factory Overhead 50 Variable Factory Overhead 50
Fixed Factory Overhead (1,400,000/35,000) 40 Product Cost 160
Product Cost 200
1st Year: Production > Sales
ABSORPTION COSTING INCOME VARIABLE COSTING INCOME STATEMENT

STATEMENT (aka Contribution Margin IS)
Sales (300 x 29,000) 8,700,000 Sales 8,700,000

Cost of Goods Variable Manufacturing
Sold (200 x 29,000) 5,800,000 Cost (160x29,000) 4,640,000
Gross Profit 2,900,000 Product Contribution Margin 4,060,000
Selling and Administrative expenses Variable Selling and Admin.
Variable S&A (15 x 29,000) 435,000 Expenses 435,000
Fixed S&A 1,600,000 Contribution Margin 3,625,000
Operating Income 865,000 Fixed Costs 3,000,000
Operating Income 625,000
There are a lot of ways to reconcile this difference, but I will just introduce two ways,
but both lead to the same thing which is to compute the change inventory level. I
hope that at this point though, you already digested the difference between the two,
and again, it rests with the fixed factory overhead.
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Production 35,000 Ending Inventory 6,000

- Sales 29,000 - Beginning Inventory 0
Change in inventory level 6,000 Change in inventory level 6,000
x Fixed Factory Overhead 40 x Fixed Factory Overhead 40
Difference in Operating Income 240,000 Difference in Operating Income 240,000
When the difference in operating income based on the above formula is positive, this
represents that absorption costing income is higher than variable costing income.
2nd Year: Production < Sales

Sales (300 x 41,000) 12,300,000
Cost of Goods Sales 12,300,000
Sold (200 x 41,000) 8,200,000 Variable Manufacturing
Gross Profit 4,100,000 Cost (160x41,000) 6,560,000
Selling and Administrative expenses Product Contribution Margin 5,740,000
Variable S&A (15 x 41,000) 615,000 Variable Selling and Admin.
Fixed S&A 1,600,000 Expenses 615,000
Operating Income 1,885,000 Contribution Margin 5,125,000
Fixed Costs 3,000,000
Operating Income 2,125,000
Production 35,000 Ending Inventory 0

- Sales 41,000 - Beginning Inventory 6,000
Change in inventory level - 6,000 Change in inventory level - 6,000
Difference in Operating Income - 240,000 Difference in Operating Income - 240,000
When the difference in operating income based on the above formula is negative, this
represents that variable costing income is higher than absorption costing income.
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3rd Year: Production = Sales

Sales (300 x 35,000) 10,500,000
Cost of Goods Sales 10,500,000
Sold (200 x 35,000) 7,000,000 Variable Manufacturing
Selling and Administrative expenses Product Contribution Margin 4,900,000
Variable S&A (15 x 35,000). 525,000 Variable Selling and Admin.
Operating Income 1,375,000 Contribution Margin. 4,375,000
Operating Income 1,375,000
Production 35,000 Ending Inventory 0

Change in inventory level 0 Change in inventory level 0
Difference in Operating Income 0 Difference in Operating Income 0
At this point, you should have finally realized that if the difference between the two lies
in the fixed overhead and since the amount of fixed overhead being expensed in
absorption costing varies based on the units sold, then that means during the
period that they were able to sell much more than the number of units they used as a
denominator in computing the fixed factory overhead per unit, then that means they
will have a greater amount of fixed overhead recognized in the income statement that
they incurred during that year and vice versa.
Year Incurred Expensed Effect on Cost Effect on Profit

(In Variable (In Aborption (In Aborption (In Aborption
Costing) Costing) Costing) Costing)
1st Php 1,400,000 Php 1,160,000 Php 240,000 lower Php 240,000 higher
Year
2nd Php 1,400,000 Php 1,640,000 Php 240,000 higher Php 240,000 lower
Year
3rd Php 1,400,000 Php 1,400,000 No difference No difference
Year
Remember that by how much you increase the cost will be the same amount you
decrease profit. Now connecting this with the way we reconcile the difference in net
income, we can come up with this:
Production > Sales AC Expense < VC Expense AC Income > VC Income

Production < Sales AC Expense > VC Expense AC Income < VC Income
Production = Sales AC Expense = VC Expense AC Income = VC Income
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Now since we are talking about fixed overhead, let’s go back to how we compute a
predetermined overhead and the fixed factory overhead per unit as we were thought
in Accounting for Overhead during ACC123.
Predetermined Fixed OH Rate per Activity = Estimated Fixed Factory Overhead

Activity Level of Cost Driver at Normal Cap.
And therefore,
Predetermined Fixed OH Rate per unit = Estimated Fixed Factory Overhead

Normal Capacity units
That is because, at the beginning of the year, we don’t know what we will actually be
able to produce and sell so we set a certain capacity level for this application rate and
the best capacity to use is the normal capacity. When normal capacity is not given,
use the budgeted capacity. If both are not given, use the practical capacity, then the
maximum before resorting to the actual capacity.
Another challenge occurs when the capacity used in arriving at the predetermined
fixed overhead is not the same as the units the company is able to produce. Notice
before we introduced this “capacity”, we only used the production in units as our
denominator level but once a capacity level is provided, we need to do a little
adjustment to this.
Example. Using the same data above but assuming Haidee&Hazel is using a normal
capacity of 32,000 units.
That means, Predetermined Fixed OH Rate per unit = 1,400,000

32,000
= 43.75 per unit
Thus,
Direct Materials 85 Direct Materials 85

Direct Labor 25 Direct Labor 25
Variable Factory Overhead 50 Variable Factory Overhead 50
Fixed Factory Overhead Product Cost 160
(1,400,000/32,000) 43.75
Product Cost 203.75
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1st Year: Production > Sales
ABSORPTION COSTING INCOME STATEMENT Now this one would not be

reconcilable with our variable costing
Sales (300 x 29,000) 8,700,000 income as it has an Unadjusted Cost
-Cost of Goods of Goods Sold.
Sold (203.75 x 29,000) 5,908,750
Gross Profit 2,791,250
-Selling and Administrative expenses
Actual Production 35,000
Variable S&A (15 x 29,000). 435,000
Normal Capacity 32,000
Fixed S&A 1,600,000
Capacity Variance in Units 3,000
x FFOH per unit 43.75
Capacity Variance in Php 131,250 F

Sales (300 x 29,000) 8,700,000
-Cost of Goods Sold. 5,908,750 Sales 8,700,000
Adj. for Favorable CV (131,250) 5,777,500 Variable Manufacturing
-Selling and Administrative expenses Product Contribution Margin 4,060,000
Variable S&A (15 x 29,000) 435,000 Variable Selling and Admin.
Operating Income 887,500 Contribution Margin. 3,625,000
Notice though that the income difference between the two is now changed to 262,500.
Production 35,000 Ending Inventory 6,000

Change in inventory level 6,000 Change in inventory level 6,000
x Fixed Factory Overhead 43.75 x Fixed Factory Overhead 43.75
Difference in Operating Income 262,500 Difference in Operating Income 262,500
The way for computing capacity variance as presented above is a lot like the way we
compute for the operating income difference between the costing method and I
intentionally put it that way in order for you to easily memorize the two important
formulas. In addition to that, the table below lays down the rule regarding the treatment
of this capacity variance.
Production > Estimated Capacity Favorable (Over-absorbed) Deduct from Unadjusted COGS
Production < Estimated Capacity Unfavorable (Under-absorbed) Add to Unadjusted COGS
Production = Estimated Capacity No Variance No Adjustment
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Garrison, Ray H., Brewer, Perter C., Noreen, Eric W. (2015). Managerial Accounting. McGraw
Hill Education.
Horngren, Charles T., Datar, Srikant M., Rajan, Madhav V. (2015). Cost Accounting A
Managerial Emphasis.
Let’s Check
Activity 1. Below are true or false questions which will help you assess you
understanding on the basic concepts of the topic discussed above based on the ULO
a-d. Simply identify whether the statements are true or false.
a1. Variable costing is the approach used for external reporting under generally
accepted accounting principles.
a2. The difference between absorption costing and variable costing is the treatment
of fixed manufacturing overhead.
a3. Selling and administrative costs are period costs under both absorption and
variable costing.
a4. Manufacturing cost per unit will be higher under variable costing than under
absorption costing.
a5. Some fixed manufacturing costs of the current period are deferred to future
periods through ending inventory under variable costing.
a6. When units produced exceed units sold, income under absorption costing is
higher than income under variable costing.
a7. When units sold exceed units produced, income under absorption costing is
higher than income under variable costing.
a8. When absorption costing is used for external reporting, variable costing can still
be used for internal reporting purposes.
a
9. When absorption costing is used, management may be tempted to overproduce
in a given period in order to increase net income.
a10. The use of absorption costing facilitates cost-volume-profit analysis.
b11. The inventory value shown on the balance sheet is generally higher under
absorption costing than under variable costing.
b12. Under absorption costing, a portion of fixed manufacturing overhead cost is
released from inventory when sales volume exceeds production volume.
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b
13. When viewed over the long term, accumulated net operating income will be
the same for variable and absorption costing if there are no ending inventories
at the end of the term.
b14. If production equals sales for the period, absorption costing and variable costing
will produce the same net operating income under LIFO.
b
15. When using absorption costing, a company may be able to show a profit even
if it is operating below the breakeven point.
b16. Under absorption costing, the profit for a period is not affected by changes in
inventory.
b17. Under variable costing, inventoriable product costs consist of direct materials,
direct labor, variable manufacturing overhead and variable selling and
administration expenses.
b18. When reconciling variable costing and absorption costing net operating
income, fixed manufacturing overhead costs deferred in inventory under
absorption costing should be deducted from variable costing net operating
income to arrive at the absorption costing net operating income.
b19. When the number of units in inventories decrease between the beginning and
end of the period, absorption costing net operating income will typically be
greater than variable costing net operating income.
b20. Under variable costing, it is possible to defer a portion of the fixed
manufacturing overhead costs of the current period to future periods through
the inventory account.
Activity 2. To help you go further, below are multiple choice questions which will
help you deepen your knowledge on the basic concepts of the topic discussed above
based on the ULO a-d. These are now a mixture of theory and short problem
questions.
b
1. Under variable costing, fixed manufacturing overhead is:
A) carried in a liability account.
B) carried in an asset account.
C) ignored.
D) immediately expensed as a period cost.
b2. Which of the following costs at a manufacturing company would be treated as
a product cost under both absorption costing and variable costing?
Variable overhead Variable selling and administrative

A) Yes Yes
B) Yes No
C) No Yes
D) No No
b3. Under absorption costing, product costs include:
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Fixed factory overhead Variable factory overhead

A) No No
B) No Yes
C) Yes Yes
D) Yes No
b4. Under variable costing:
A) net operating income will tend to move up and down in response to changes
in levels of production.
B) inventory costs will be lower than under absorption costing.
C) net operating income will tend to vary inversely with production changes.
D) net operating income will always be higher than under absorption costing.
b5. In an income statement prepared using the variable costing method, fixed
selling and administrative expenses would:
A) be used in the computation of the contribution margin.
B) be used in the computation of net operating income but not in the computation
of the contribution margin.
C) be treated the same as variable manufacturing expenses.
D) not be used.
b6. In an income statement prepared as an internal report using variable costing,
variable selling and administrative expenses would:
A) not be used.
B) be used in the computation of the contribution margin.
C) be used in the computation of net operating income but not in the computation
of the contribution margin.
D) be treated the same as fixed selling and administrative expenses.
b7. When production exceeds sales, the net operating income reported under
absorption costing generally will be:
A) less than net operating income reported under variable costing.
B) greater than net operating income reported under variable costing.
C) equal to net operating income reported under variable costing.
D) higher or lower because no generalization can be made.
b8. Advocates of variable costing argue that:
A) fixed production costs should be added to inventory because such costs have
future service potential and therefore are inventoriable as an asset.
B) fixed production costs should be capitalized as an asset and amortized over
future periods when benefits from such costs are expected to be received.
C) fixed production costs should be charged to the period in which they are
incurred unless sales do not equal production in which case any difference
should be capitalized as an asset and amortized over future periods.
D) fixed production costs should be charged to the period in which they are
incurred.
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b9. Chou Company produces a single product, a special gear used in automatic
transmissions. Each gear sells for P28, and the company sells 500,000 gears
each year. Unit cost data are presented below:
Variable Fixed
Direct material P6.00
Direct labor P5.00
Manufacturing overhead P2.00 P7.00
Selling & administrative P4.00 P3.00
The unit product cost of gears under variable costing is:

A) P13
B) P20
C) P17
D) P27
b10. Alucard Company produces a single product. Variable production costs are
P12 per unit and variable selling and administrative expenses are P3 per unit.
Fixed manufacturing overhead totals P36,000 and fixed selling and
administration expenses total P40,000. Assuming a beginning inventory of
zero, production of 4,000 units and sales of 3,600 units, the dollar value of the
ending inventory under variable costing would be:
A) P4,800
B) P8,400
C) P6,000
D) P3,600
b11. Nana Company produces a single product. Last year, the company's net
operating income computed by the absorption costing method was P6,400,
and its net operating income computed by the variable costing method was
P9,100. The company's unit product cost was P17 under variable costing and
P20 under absorption costing. If the ending inventory consisted of 2,100 units,
the beginning inventory in units must have been:
A) 1,200
B) 2,100
C) 3,000
D) 4,800
b12. King Tigreal Company produces a single product. During March, the company
had net operating income under absorption costing that was P3,500 lower
than under variable costing. The company sold 7,000 units in March, and its
variable costs were P7 per unit, of which P3 was variable selling expense. If
fixed manufacturing overhead was P2 per unit under absorption costing, then
how many units did the company produce during March?
A) 5,250 units
B) 8,750 units
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C) 6,500 units
D) 6,125 units
b13. Pharsa Corporation produces a single product. Last year, the company had
net operating income of P50,000 using variable costing. Beginning and ending
inventories were 13,000 units and 18,000 units, respectively. If the fixed
manufacturing overhead cost was P2.00 per unit, what would have been the
net operating income using absorption costing?
A) P40,000
B) P50,000
C) P60,000
D) P86,000
b14. Hanna Bi company that produces a single product had a net operating income
of P85,500 using variable costing and a net operating income of P90,000
using absorption costing. Total fixed manufacturing overhead was P150,000,
and production was 100,000 units. Between the beginning and the end of the
year, the inventory level:
A) increased by 4,500 units
B) decreased by 4,500 units
C) increased by 3,000 units
D) decreased by 3,000 units
b15. Balmond Company produces a single product. Last year, the company had
16,000 units in its beginning inventory. During the year, the company's
variable production costs were P6 per unit and its fixed manufacturing
overhead costs were P4 per unit. The company's net operating income for the
year was P24,000 higher under absorption costing than it was under variable
costing. Given these facts, the number of units in the ending inventory must
have been:
A) 22,000 units
B) 10,000 units
C) 6,000 units
D) 4,000 units
c 16. A criticism of variable costing for managerial accounting purposes is that it
A) is not acceptable for product line segmented reporting.
B) does not reflect cost-volume-profit relationships.
C) overstates inventories.
D) might encourage managers to emphasize the short term at the expense of the
long term.
c 17. The use of variable costing requires knowing
A) the contribution margin and break-even point for each product.
B) the variable and fixed components of production cost.
C) controllable and noncontrollable components of all costs.
D) the number of units of each product produced during the period.
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c 18. Advocates of variable costing for internal reporting purposes do NOT rely on
which of the following points?
A) The matching concept.
B) Price-volume relationships.
C) Absorption costing does not include selling and administrative expenses as
part of inventoriable cost.
D) Production influences income under absorption costing.
c 19. Which variance CANNOT arise under variable costing?
A) variable overhead budget variance.
B) variable overhead efficiency variance.
C) fixed overhead budget variance.
D) fixed overhead volume variance.
c 20. Gamma Corporation has total budgeted fixed costs of P150,000. Actual
production was 8,000 units; normal capacity is 7,500 units. What was the
volume variance?
A) P10,000 favorable
B) P15,000 favorable
C) P15,000 unfavorable
D) P10,000 unfavorable
Let’s Analyze
At this point, we will now evaluate your ability to analyze and prepare the sought-
after outcome of the topic we have discussed. Below are different problems with
different requirements which are more outcome-based. Now, I will require you to
prepare your answers in excel sheets and in a report format. This is now the time to
bring out a management accountant in you.
b
1-3. Eudora Corporation manufactures a propeller. Shown below is Eudora’s cost
structure:
Variable cost per propeller Total fixed cost for the year
Manufacturing cost P114 P810,000
Selling and administrative P20 P243,000
In its first year of operations, Eudora produced 60,000 propellers but only sold
54,000.
1. What is the total cost that would be assigned to Eudora's finished goods
inventory at the end of the first year of operations under the variable costing
method?
2. At what amount will Eudora report its cost of goods sold for this first year for
external reporting purposes?
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3. Which costing method (variable or absorption) will generate a higher net

operating income in Eudora's first year of operations and by how much?
b4-11.Ruby Company, which has only one product, has provided the following data
concerning its most recent month of operations:
Selling price P129
Units in beginning inventory 0

Units produced 6,300
Units sold 6,100
Units in ending inventory 200
Variable costs per unit:

Direct materials P32
Direct labor P50
Variable manufacturing overhead P5
Variable selling and administrative P11
Fixed costs:
Fixed manufacturing overhead P88,200
Fixed selling and administrative P97,600
4. What is the unit product cost for the month under variable costing?
5. What is the unit product cost for the month under absorption costing?
6. The total contribution margin for the month under the variable costing
approach is:
7. The total gross margin for the month under the absorption costing approach
is:
8. What is the total period cost for the month under the variable costing
approach?
9. What is the total period cost for the month under the absorption costing
approach?
10. What is the net operating income for the month under variable costing?
11. What is the net operating income for the month under absorption costing?
b12-14. Silvanna Company's absorption costing income statements for the last two
years are presented below:
Year 1 Year 2
Sales P70,000 P90,000
Less cost of goods sold:
Beginning inventory 0 6,000
Add cost of goods manufactured 48,000 48,000
Goods available for sale 48,000 54,000
Less ending inventory 6,000 0
Cost of goods sold 42,000 54,000
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Gross margin 28,000 36,000

Less selling & admin. expenses 25,000 31,000
Net operating income P 3,000 P 5,000
Data on units produced and sold in each of these years are given below:
Year 1 Year 2
Units in beginning inventory 0 1,000
Units produced 8,000 8,000
Units sold 7,000 9,000
Fixed factory overhead totaled P16,000 in each year. This overhead was
applied to products at a rate of P2 per unit. Variable selling and administrative
expenses were P3 per unit sold.
12. Compute the unit product cost in each year under variable costing.
13. Prepare new income statements for each year using variable costing.
14. Reconcile the absorption costing and variable costing net operating income
for each year.
b15-17. Lesley Company, which has just started its operation and has only one
product, hired you as management consultant to help them evaluate their
operations. The CEO is quite confused with absorption costing and variable
costing and which to base their future decisions. Their bookkeeper has provided
the following data concerning its most recent month of operations:
Selling price P143
Units in beginning inventory 0

Units produced 1,200
Units sold 1,000
Units in ending inventory 200
Variable costs per unit:

Direct materials P33
Direct labor P52
Variable manufacturing overhead P1
Variable selling and administrative P7
Fixed costs:
Fixed manufacturing overhead P38,400
Fixed selling and administrative P4,000
15. Prepare an income statement for the month using the contribution format and
the variable costing method.
16. Prepare an income statement for the month using the absorption costing
method.
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17. Cite the advantages and disadvantages of variable costing method and which
method should the company use if they want to know how many units they
should sell next period to achieve their target profit? Address and explain this
to the management of Lesley Company.
c18-20. Selena Industries manufactures a single product. Variable production costs
are P20 and fixed production costs are P150,000. Selena uses a normal
activity of 10,000 units to set its standard costs. Selena began the year with
no inventory, produced 11,000 units, and sold 10,500 units.
18. Ending inventory under variable costing and absorption costing would be
19. The volume variance under variable costing and absorption costing would be
20. By how much would the income between the two methods would differ
In a Nutshell
Activity 1. Absorption costing and variable costing differ in three aspects:
1. with their treatment of the fixed overhead

Absorption Costing – product cost
Variable Costing – period cost
2. how they present cost in their respective income statement.
Absorption Costing – presents cost according to its function-product and
period.
Variable Costing – contribution margin income statement – according to
behavior.
3. and how they are being used in business.
Absorption Costing – external reporting
Variable Costing – internal reporting
Based on these, discuss the relationship among the way the two costing methods treat
fixed overhead, how they present cost and how they are being used in the business?
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Q&A LIST
1.
2.
3.
4.
5.
KEYWORDS INDEX
Absorption Costing (Idle) Capacity Variance Predetermined Overhead Rate
Budgeted Capacity Normal Capacity Product Cost
Contribution Margin Income Period Cost Variable Costing
Ideal/Theoretical Capacity Practical Capacity
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Course Schedule
Please be guided by this calendar of activities (Weeks 1-3).

Activity Date Where to submit
Weeks 1-3 ULO A Let’s Check Activity
Weeks 1-3 ULO A Let’s Analyze Activity
Weeks 1-3 ULO A In a Nutshell Activity
Weeks 1-3 ULO A Q&A List
Weeks 1-3 ULO B Research
Weeks 1-3 ULO B Let’s Check Activity
Weeks 1-3 ULO B Let’s Analyze Activity
Weeks 1-3 ULO B In a Nutshell Activity
Weeks 1-3 ULO B Q&A List
Weeks 1-3 ULO C Let’s Check Activity
Weeks 1-3 ULO C Let’s Analyze Activity
Weeks 1-3 ULO C In a Nutshell Activity
Weeks 1-3 ULO C Q&A List
Weeks 1-3 ULO D-F Let’s Check Activity
Weeks 1-3 ULO D-F Let’s Analyze Activity
Weeks 1-3 ULO D-F In a Nutshell Activity
Weeks 1-3 ULO D-F Q&A List
First Exam
Special Instructions: Sample Filename Formats:
STUDENT’S SURNAME_1-3 ULO_A_Check_1
1. All online submissions must be in PDF file. STUDENT’S SURNAME_1-3 ULO_B_ Analyze_1
2. Follow sample filename format. Filename STUDENT’S SURNAME_1-3 ULO_C_ Nutshell_1
STUDENT’S SURNAME_1-3 ULO_C_Research
will serve as your guide in your submission. STUDENT’S SURNAME_1-3 ULO_C_Budget
STUDENT’S SURNAME_1-3 ULO_C_Practice
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Big Picture
to
a. Explain what strategic cost management is and how it can be used to help a
firm create a competitive advantage.
b. Discuss the basic features of the Balanced Scorecard and the delivery
performance measures.
Strategic Cost Management
Big Picture in Focus: ULOa. Explain what strategic cost management is

and how it can be used to help a firm create a competitive advantage.
Metalanguage
In this section, the most essential terms relevant to the study of strategic cost
management and to demonstrate ULOa will be operationally defined to establish a
common frame of reference as to how the texts work in your chosen field or career.
1. Strategic cost management. This refers to the use of cost data to develop and
identify superior strategies that will produce a sustainable competitive advantage.
2. Strategic decision making. This is choosing among alternative strategic with the
goal of selecting a strategy that provides a company with reasonable assurance
of long-term growth and survival.
3. Competitive advantage. It is creating better customer value for the same or lower
cost than offered by competitors, or creating equivalent or better value for lower
cost than offered by competitors.
4. Customer value. This is the difference between what a customer receives
(customer realization) and what a customer gives up (customer sacrifice).
5. Total product. This is what the customer receives, also known as customer
realization. The complete range of tangible and intangible benefits received out of
purchasing a product includes basic and special product features, service, quality,
instructions for use, reputation, brand name, and any other factors deemed
important by customers.
6. Customer sacrifice. This includes the cost of purchasing the product, the time
and effort spent in acquiring and learning to use the product, and after-purchase
costs, which are costs of using, maintaining, and disposing of the product.
7. Value chain. This pertains to the linked set of value-creating activities from basic
raw materials to the disposal of the finished product by end-use customers.
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8. Supply chain. This is the sequence of processes involved in the production and
distribution of a commodity describing the relationship between a supplier and a
customer.
9. Organizational activities. These are actions taken to sustain the operations of
the organization.
10. Operational activities. These are activities directly related to the production of
goods or services.
11. Cost driver. It is anything that causes the incurrence of a cost. It may be an object,
event or activity, depending on the cost management approach used.
12. Product life cycle. In this section, this is regarded as the producer’s viewpoint on
the product life cycle which has two versions.
13. Consumable life cycle. This is the consumer’s viewpoint on the product’s life-
cycle.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for Weeks 4-5 of
the course, you need to fully understand the following essential knowledge that will be
laid down in the succeeding pages. Please note that you are not limited to exclusively
refer to these resources. Thus, you are expected to utilize other books, research
articles and other resources that are available in the university’s library e.g. ebrary,
search.proquest.com etc.
There are three general strategies in increasing customer value to achieve a

competitive advantage. These are: cost leadership, product differentiation, and
focusing.
Cost Leadership Strategy

Objective: To provide the same or better value to customers at a lower cost than
offered by competitors.
If
customer value = customer realization – customer sacrifice
then, a low-cost strategy

increases customer value
by minimizing customer sacrifice
Examples: redesigning a product so that fewer parts are needed, lowering production
costs and the costs of maintaining the product after purchase
Differentiation Strategy
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Objective: To increase customer value by increasing what the customer receives

(customer realization).
If
then, a differentiation strategy

by providing something to customers that is not provided by competitors
creating product characteristics (functional, aesthetic, or stylistic)
that set the product apart from its competitors
Examples: a food provider offering free delivery service unusual to competitors, a

retailer offering on-site repair service not offered by rivals, a producer of personal
computers, laptops and cellular phones such as Apple Inc. using an exclusive
operating system not compatible with other brands
There is competitive advantage if the following are achieved:

a. Customers must see the variations as important.
b. The value added to the customer by differentiation must exceed the firm’s costs
of providing the differentiation.
Focusing Strategy
Objective: To establish competitive advantage by selecting or emphasizing a market
or customer segment in which to compete.
If
then, a focusing strategy

thru the following ways:
a. Select the markets and customers that appear attractive and then develop the
capabilities to serve these targeted segments.
b. Select specific segments (e.g. customers and geographic regions) where the firm’s
core competencies in the segments are superior to those of competitors.
Firms may choose not just one general strategy, but a combination of strategies.
Strategic Positioning
-the process of selecting the optimal mix of these three general strategic approaches
with the end view of creating a sustainable competitive advantage
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Strategy may include the following:

a. choosing the market and customer segments the business unit intends to serve,
b. identifying the critical internal business processes that the unit must excel at to
deliver the value propositions to customers in the targeted market segments,
c. selecting the individual and organizational capabilities required for the internal,
customer, and
d. financial objectives.
What is the role of cost management in strategic positioning?

objective of strategic cost management is to reduce costs while simultaneously
strengthening the selected strategic position
Remember that competitive advantage is tied to costs.
VALUE-CHAIN ANALYSIS
-basic to successful implementation of cost leadership and differentiation strategies
Companies add value through the following events and activities:
1. Research and Development–the generation of, and experimentation with, ideas
related to new products, services or processes
2. Design of products, services, or processes–the detailed planning and
engineering of products, services, or processes
3. Production–the acquisition, coordination, and assembly of resources to produce a
product or deliver a service
4. Marketing–the manner by which companies promote and sell their products or
services to customers or perspective customers
5. Distribution–the delivery of products or services to customers
6. Customer Service–the after-sale support provided to customers
Value-chain analysis relies on identifying and exploiting internal and external linkages.
Internal linkages-relationships among activities that are performed within a firm’s
portion of the value chain
External linkages-describe the relationship of a firm’s value-chain activities that are
performed with its suppliers and customers
To exploit these linkages,

a. identify activities and select those that can be used to produce (or sustain) a
competitive advantage
b. classify as organizational activities and operational activities
c. determine the costs of these activities with the use of organizational and operational
cost drivers; refer to examples below
Organizational Activities and Drivers
Structural Activities Drivers
Building plants number of plants, scale, degree of
centralization
Management structuring management style and philosophy
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Grouping employees number and type of work units

Having complexity number of product lines, number of unique
processes, number of unique parts, degree
of complexity
Vertical integrating scope, buying power, selling power
Selecting and using process technologies types of process technologies, experience
Executional Activities Drivers
Using employees degree of involvement
Providing quality quality management approach
Providing plant layout plant layout efficiency
Designing and producing products product configuration
Providing capacity capacity utilization
Operational Activities and Drivers
Unit-Level Activities Drivers
Grinding parts Grinding machine hours
Assembling parts Assembly labor hours
Drilling holes Drilling machine hours
Using materials Pounds of material
Using power Number of kilowatt-hours
Batch-Level Activities Drivers
Setting up equipment Number of setups
Moving batches Number of moves
Inspecting batches Inspection hours
Reworking products Number of defective units
Product-Level Activities Drivers
Redesigning products Number of change orders
Expediting Number of late orders
Scheduling Number of different products
Testing products Number of procedures
Activity Drivers
-explain changes in activity costs by measuring changes in activity output (usage)
2 major categories:
1. Unit-level drivers – explain changes in cost as units produced changes (ex.
pounds of DM. kilowatt-hours used to run production machinery, and DLH
2. Non-unit-level drivers – explain how costs change as factors other than the
number of units produced changes (ex. number of set-ups, work orders,
engineering change orders, inspection hours and material moves)
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In a traditional cost management system-cost behavior is assumed to be described

by unit-based drivers only
In activity-based cost management system-both unit and non-unit-based drivers
are used; thus, provides much richer view of cost behavior
LIFE-CYCLE COST MANAGEMENT

Life-cycle cost management is considered a type of strategic cost analysis. It
requires an understanding of the three types of life-cycle viewpoints: the marketing
viewpoint, the production viewpoint, and the consumable life viewpoint. By considering
the interrelationships among the three viewpoints, managers develop insights that help
maximize life-cycle profits.
Product Life-Cycle
(Producer Viewpoint)
In life cycle, product may refer to a class (i.e. automobiles) or specific form (i.e.
station wagon) or specific brand or model (i.e. Subaru Outback).
There are two viewpoints concerning product life cycle: the marketing viewpoint
and the production viewpoint.
Marketing Viewpoint
-describes the general sales pattern of a product
General Pattern of Product Life Cycle: Marketing Viewpoint
Units of Sales
Introduction Growth Maturity Decline

Figure 5. Product Life Cycle: Marketing Viewpoint
Product Life-Cycle Stages

1. Introduction stage-characterized by preproduction and startup activities; focused
on obtaining a foothold in the market; no sales for a period of time (the
preproduction period); and, then slow sales growth as the product is introduced
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2. Growth stage-a period of time when sales increase more quickly

3. Maturity stage-is a period of time when sales increase more slowly. Eventually, the
slope (of the sales curve) in the maturity stage becomes neutral and then turns
negative
4. Decline stage-when the product loses market acceptance and sales begin to
decrease
Production Viewpoint
-defines stages of the life cycle by changes in the type of activities performed
Product Life Cycle: Production Viewpoint

Life-Cycle Cost %
Research Planning Design Testing Production Logistics

Figure 6. Product Life Cycle: Production Viewpoint
Product Life-Cycle Activities

1. Research activities (product conception)
2. Development activities (planning, design, and testing)
3. Production activities (conversion activities), and
4. Logistical activities (advertising, distribution, warranty, customer service, product
servicing, and so on)
Difference between viewpoints:

production viewpoint emphasizes life-cycle costs
market viewpoint emphasizes sales revenue behavior
Life-cycle costs-all costs associated with the product for its entire life cycle
90% or more are committed during the development stage of the product’s life cycle
Committed-most of the costs that will be incurred are predetermined, set by the nature
of the product design and the processes needed to produce the design
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Consumable Life-Cycle
(Consumer Viewpoint)
-emphasizes product performance for a given price (costs of ownership)
-costs of ownership includes costs related to the consumption life-cycle activities
-total customer satisfaction is affected by both purchase price and post-purchase costs
Consumption Life-Cycle activities:
(1) purchasing; (2) operating; (3) maintaining; and (4) disposal
Life-Cycle Cost Management

(Interactive Viewpoint)
-an integration of the three life-cycle viewpoints that can be useful to producers of
goods and services
-consists of actions taken that cause a product to be designed, developed, produced,
marketed, distributed, operated, maintained, serviced, and disposed of so that life-
cycle profits are maximized
Ways of maximizing profits

(1) revenue enhancement
(2) cost reduction opportunities
Life-cycle cost management emphasizes cost reduction, not cost control.
Role of Target Costing

-plays an essential role in life-cycle cost management by providing a method for
reducing costs in the design stage by considering and exploiting both customer and
supplier linkages
target = sales price needed to capture - desired per-unit

cost predetermined market share profit
sales price-reflects the product specifications or functions valued by the customer

(referred to as product functionality)
If the target cost is less than what is currently achievable, then management must find
cost reductions that move the actual cost toward the target cost.
Three cost reduction methods:

(1) reverse engineering-a “tear down” analysis whereby the competitors’ products
are closely analyzed to discover more design features that create cost reductions
(2) value analysis-attempts to assess the value placed on various product functions
by customers
(3) process improvement-redesigning processes to improve efficiency and achieve
needed cost reductions
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Let’s Check
Activity 1. Now that you know the most essential terms in the study of strategic cost
management system, let us try to check your recollection of these terms. In the spaces
provided below, write the missing terms to complete the following statements:
1. _______________ is the use of cost data to develop and identify superior

strategies that will produce a sustainable competitive advantage.
2. _______________ is creating better customer value for the same or a lower cost
than offered by competitors, or creating equivalent or better value for lower cost
than offered by competitors.
3. _______________ is the difference between what a customer receives and what
he parts with.
4. _______________ is what the customer gives up that includes the cost of
purchasing the product, the time and effort spent in acquiring and learning to use
the product, and after-purchase costs.
5. _______________ involves choosing among alternative strategic with the goal of
selecting a strategy that provides a company with reasonable assurance of long-
term growth and survival.
6. _______________ is the process of selecting the optimal mix of strategic
approaches in creating a sustainable competitive advantage.
7. _______________ is the linked set of value-creating activities from basic raw
materials to the disposal of the finished product by end-use customers.
8. _______________ describe the relationship of a firm’s value-chain activities that
are performed with its suppliers and customers.
9. _______________ is the pre-production phase in the product life-cycle that
specifically includes product conception, planning, design and testing.
10. _______________ are costs associated with the product for its entire life cycle.
11. _______________ describes the general sales pattern of a product.
12. _______________ is a period of time when sales increase more slowly and
eventually evens out.
13. _______________ is a life-cycle that emphasizes product performance for a given
price.
14. _______________ is a cost management tool that provides a method of reducing
costs in the design stage.
15. _______________ is a cost reduction method whereby the competitors’ products
are closely analyzed to discover more design features that can reduce cost.
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Let’s Check
1. Which of the following does not represent a main focus of cost management
information?
a. Strategic management c. Internal auditing and control
b. Performance evaluation d. Planning and decision making
2. Strategic management can be defined as the development of a sustainable

a. Chain of command c. Cash flow
b. Competitive advantage d. Company reputation
3. When managers produce customer value, their orientation consists of all the
following, except
a. State of the art manufacturing facilities
b. The ability to respond to customers’ desire for specific features
c. Quality and service
d. Timely delivery
4. Target costing determines the desired cost for a product upon the basis of a given
competitive price such that the product will
a. earn at least a small profit. c. earn a desired profit.
b. earn the maximum profit. d. break-even.
5. Which of the following aspects of a company would not be considered a critical

success factor, for a company that competes on differentiation?
a. Cutting edge research and development
b. Excellent customer service
c. Award-winning product quality
d. High level of production efficiency
6. In keeping with the current trend of increased strategic planning, how have
management accountants changed their use of life-cycle costing?
a. They have shifted their focus from R&D costs to marketing and promotion
costs.
b. They have turned from a sole focus on manufacturing costs to a much wider
outlook, taking into account costs from the entire product life-cycle.
c. They stopped looking at the entire life-cycle, and now focus their attention on
product design costs.
d. Accountants do not use life-cycle costing. That task is left to the operations
manager.
7. The steps in strategic decision making include all of the following except
a. Gather, summarize and report accounting information
b. Identify alternative courses of action then implement the desired alternative.
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c. Determine the strategic issues surrounding the problem

d. Provide an ongoing evaluation
8. The competitive strategy of cost leadership allows a firm to outperform competitors

by producing products or services
a. With lowered quality standards, thus, reducing overall costs.
b. In smaller operational units.
c. At lower cost achieved by increased productivity.
d. That are heavily promoted and warranted.
9. The competitive strategy in which the firm succeeds by developing and

maintaining a unique value for the product, as perceived by the customer, is
termed
a. Differentiation c. Design strategy
b. Product specialization d. Benchmarking
10. A strategy can be best defined as

a. An effective use of the organization’s resources.
b. A plan for using a firm’s resources to achieve sustainable goals within a
competitive environment.
c. A clear and detailed statement of an organization’s mission and vision.
d. A plan for developing a firm’s mission and vision statements.
Let’s Analyze
Activity 1. In your own words of not less than two hundred, explain what strategic
cost management is and how it can be used to help a firm create a competitive
advantage.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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In a Nutshell
Activity 1. Strategic cost management is vital to the long-term survival of an
organization. Its concept is anchored on the premise that in order to stay on the
playing field, the organization has to establish a competitive advantage.
In this portion of the module, you were introduced to the concept of strategic cost
management. Now, you will be required to state your arguments or synthesis relevant
to the topics presented. I will supply the first two items and you will continue the rest.
1. There is no single best strategy. A firm can mix the three general strategies to
define its strategic position.
2. The objective of strategic cost management is reduction of cost while building
the firm’s strategic position.
Your Turn
3. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
4. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
5. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
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Q&A LIST
1.
2.
3.
4.
5.
KEYWORDS INDEX
Activity-Based Cost Mgmt. Differentiation Strategy Research and Development
Batch-Level Driver Distribution Strategic Cost Management
Competitive Advantage External Linkages Strategic Decision Making
Cost Driver Internal Linkages Strategic Positioning
Cost Leadership Strategy Focusing Strategy Strategy
Consumable Life-Cycle Life-Cycle Cost Management Supply Chain Analysis
Customer Realization Marketing Target Costing
Customer Sacrifice Operational Activities Total Product
Customer Service Organizational Activities Traditional Cost Mgmt.
Customer Value Product-Level Driver Unit-Level Driver
Design Product Life-Cycle Value Chain Analysis
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Balanced Scorecard
Big Picture in Focus: ULOb. Discuss the basic features of the

Balanced Scorecard and the delivery performance measures.
Metalanguage
In this section, the most essential terms relevant to the study of the Balanced
Scorecard and to demonstrate ULOb will be operationally defined to establish a
common frame of reference as to how the texts work in your chosen field or career.
1. Strategic performance management system. This system utilizes performance

measures and evaluation designed to support the organization’s strategy and
objectives.
2. Balanced scorecard. This is a performance management system that puts
strategy at the center of attaining organizational goals and objectives.
3. Lag measures. These are outcome measures or measures of results from past
efforts. Example: customer profitability
4. Lead measures. These are performance drivers or factors that drive future
performance. Example: hours of employee training
5. Objective measures. Those measures that can be readily quantified and verified.
Example: market share
6. Subjective measures. Those measures that are less quantifiable and more
judgmental in nature. Example: employee capabilities
7. Financial measures. Those measures expressed in monetary terms. Example:
Net Profit (Loss)
8. Nonfinancial measures. Those measures that use nonmonetary units. Example:
number of dissatisfied customers
9. External measures. Those measures that relate to customers and shareholders.
Example: customer satisfaction and ROI
10. Internal measures. Those measures that relate to the processes and capabilities
that create value for customers and shareholders. Example: process efficiency
and employee satisfaction
Essential Knowledge
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Strategic Performance Management System

Different Models
a. Traditional approach-uses performance measures which are almost always
financial
b. Activity-based approach-utilizes financial and process-oriented measures
c. Strategic-based approach-adds refinements to the activity-based measures that
translates the organization’s strategy
The organization’s strategy is translated into objectives and measures. To align

individual and organizational goals and initiatives, these objectives and measures
must be clearly understood, communicated and acted upon by members of the
organization. Goal congruence is best achieved if the measures are balanced and
linked to the organization’s strategy.
Balanced measures are balanced between:

a. lag measures vs. lead measures
b. objective measures vs. subjective measures
c. financial measures vs. nonfinancial measures
d. external measures vs. internal measures
To establish a closer link to strategy, many different performance measures are used
in the Balanced Scorecard.
THE BALANCED SCORECARD

-expresses the complete story of a company’s strategy through an integrated set of
financial and nonfinancial measures classified into four perspectives
Four Perspective of Performance Measures
1. The financial perspective
2. The customer perspective
3. The internal business process perspective
4. The learning and growth perspective
Sample Objectives and Measures
Financial Perspective: establishes the long- and short-term financial performance
objectives which has three strategic themes: revenue growth, cost reduction and asset
utilization
Objectives Measures
Revenue Growth
Increase the number of new products Percentage of revenues from new products
Create new applications Percentage of revenues from new
applications
Develop new customers and markets Percentage of revenues from new sources
Adopt a new pricing strategy Product and customer profitability
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Cost Reduction
Reduce unit product cost Unit product cost
Reduce unit customer cost Unit customer cost
Reduce distribution channel cost Cost per distribution channel
Asset Utilization
Improve asset utilization ROI, EVA
Customer Perspective: defines and selects the customer and market segments in
which the company chooses to compete; the source of the revenue component for the
financial objectives
Objectives Measures
Core
Increase market share Percentage of market
Increase customer retention Percentage growth, Percentage of
repeating customers
Increase customer acquisition Number of new customers
Increase customer satisfaction Ratings from customer surveys
Increase customer profitability Customer profitability
Performance Value
Decrease price Price
Decrease post-purchase costs Post-purchase costs
Improve product functionality Ratings from customer surveys
Improve product quality Percentage or returns
Increase delivery reliability On-time delivery percentage, Aging
schedule
Improve product image Ratings from customer surveys
Internal Business Process Perspective: processes are the means for creating
customer and shareholder value; entails the identification of processes needed to
achieve customer and financial objectives; the process value chain is made up of three
processes: the innovation process, the operations process and the post-sales process
Objectives Measures
Innovation
Increase number of new products Number of new products/total products
R&D expenses
Increase proprietary products Percentage revenue from proprietary
products; Number of patents pending
Decrease product development cycle time Time to market (from start to finish)
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Operations
Increase process quality Quality costs, Output yields,
Percentage of defective units
Increase process efficiency Unit cost trends, Outputs/inputs
Decrease process time Cycle time and velocity, MCE
Post-sales Service
Increase service quality First-pass yields
Increase service efficiency Cost trends, Outputs/input
Decrease service time Cycle time
Some common internal business process performance measures:
Delivery Performance Measures

Order Start of Goods
Received Production Shipped
Wait Time Process Time + Inspection Time + Move Time + Queue Time
Throughput Time (Manufacturing)
Delivery Cycle Time
Figure 7. Delivery Cycle
Delivery Cycle Time = Time from ordering up to the shipment of the goods
Throughput Time = Manufacturing Cycle Time

= Time from the start of production until the goods are shipped
= Process Time + Inspection Time + Move Time + Queue Time
Process Productivity = Total Units / Value-added Time
Process Quality Yield = Good Units / Total Units
Throughput per hour = Process Productivity x MCE x Process Quality Yield

= Good Units Manufactured / Total Processing Time
Manufacturing Cycle Efficiency = Value-added Time

Throughput Time
Waiting Time = Annual Average x Manufacturing Time

Number of Orders per order
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Note:
value added time : process time
non-value added time : inspection time, move time and queue time
Learning and Growth Perspective: the source of the capabilities that enable the
accomplishment of the other three perspectives’ objectives; has three major
objectives: increasing employee capabilities; increasing motivation, empowerment,
and alignment; and increasing information systems capabilities
Objectives Measures
Employee Capabilities
increase Employee satisfaction ratings
Employee turnover percentage
Employee productivity
Hours of training
Motivation and Alignment
increase Suggestions per employee
Suggestion implemented per employee
Information Systems Capabilities
increase Percentage of processes with real-time
feedback capabilities
Let’s Check
1. Which of these is the perspective of the balanced scorecard that is at the top of a
nonprofit organizations mission statement?
a. Financial perspective
b. Internal business and production process perspective
c. Learning and growth perspective
d. Customer perspective
2. Which of these is the perspective of the balanced scorecard that is at the top list
for a company’s lenders and shareholders?
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a. Financial perspective
b. Internal business and production process perspective
c. Learning and growth perspective
d. Customer perspective
3. Financial control highlights

a. falling profits c. high prices
b. poor quality d. unsatisfactory service
4. Which of the following statements is FALSE regarding financial and nonfinancial

measures of performance?
a. Nonfinancial measures may help to anticipate and explain financial results.
b. Financial results include aggregate measures.
c. Nonfinancial results may help to identify the causes of financial results.
d. Financial results are lead indicators of future success.
5. The purpose of the balance scorecard is BEST described as helping an

organization
a. develop customer relation.
b. mobilize employee skills for continuous improvements in processing
capabilities, quality, and response times.
c. introduce innovative products and services desired by target customers.
d. translate an organization’s mission and strategy into a set of performance
measures that help to implement the strategy.
Let’s Check
Activity 2. Let us try to check your understanding of the four perspectives contained
in the Balanced Scorecard. On the space provided for, classify each performance
measure. Write F (Financial); C (Customer); P (Process); or LG (Learning and
Growth).
_____1. Market share _____9. Number of vendors used

_____2. Earnings per share _____10. Cash flow from operations
_____3. Manufacturing cycle efficiency _____11. Employee training hours
_____4. Machine downtime _____12. Gross margin
_____5. Number of patents held _____13. Employee education
_____6. Employee suggestions _____14. Manufacturing downtime
_____7. Number of repeat sales _____15. Service response time
_____8. Levels of inventories held
Let’s Analyze
Activity 1. Let us test your skill in using delivery performance measures. Read each
problem carefully and provide what is being required.
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Problem 1 (adapted)
The Cute Corporation produces small plastic dolls in its Florida manufacturing plant.
The company is currently evaluating ways to improve productivity. The accountant of
the firm’s parent organization suggested that management implement a new
compensation plan based on throughput performance measure as an incentive to
increase productivity. To demonstrate how such a measure might work, the
accountant gathered the following production data for a recent month:
Total units attempted 6,000,000
Good units manufactured 4,800,000
Processing time (total hours) 800
Value-added processing 600
Required:
1. How many defective units were produced?
2. Compute manufacturing cycle efficiency (MCE).
3. Compute process productivity.
4. Compute process quality yield.
5. Compute hourly throughput.
Problem 2 (adapted)
Electron Inc. produces a variety of electronic products which it sells to retail stores
throughout the country. The following data is available for the year for one of the
products:
Units started into production 2,000,000
Total goods units completed 1,950,000
Total hours of value-added production time 300,000
Total production hours 380,000
Required:
1. Compute the manufacturing cycle efficiency (MCE).
2. What is the total throughput per hour?
Problem 3 (adapted)
The following information for a recent project was taken from the records of Glory
Company:
Days
Process Time 15.0
Inspection 0.5
Waiting Time
From order receipt until start of production 6.0
From start of production through project completion 3.0
Move Time 1.5
Required:
1. How long did it take to complete the project once production commenced?
2. Compute the manufacturing cycle efficiency.
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3. As judged by the cycle efficiency, what percentage of the overall production

time was spent on (1) value adding activities and (2) non-value adding
activities?
Problem 4 (adapted)
Ninong Corporation’s management keeps track of the time it takes to process orders.
During the most recent month, the following average times were recorded per order:
Days
Wait Time 15.6
Inspection Time 0.8
Process Time 1.6
Move Time 0.7
Queue Time 3.9
Required:
1. Compute the throughput time.
2. Compute the manufacturing cycle efficiency (MCE).
3. What percentage of the production time is spent in non-value-added activities?
4. Compute the delivery cycle time.
Problem 5 (adapted)
Laredo Company is a manufacturer of electronic components. The following
manufacturing information is available for the month of May:
Good units manufactured 40,000

Value-added hours of manufacturing time 20,000
Total units manufactured 50,000
Total hours of manufacturing time 30,000
Required:
1. What is the throughput per hour?
2. What is the process quality yield?
In a Nutshell
Activity 1. The Balanced Scorecard is a strategic performance management system
that translates the vision and strategy of an organization into operational objectives
and measures.
In this portion of the module, you were oriented about the Balanced Scorecard as a
management tool and the different delivery performance measures. Now, you will be
required to state your arguments or synthesis relevant to the topics presented. You
may highlight their basic features. I will supply the first two items and you will continue
the rest.
1. The Balanced Scorecard actually unfolds a company’s strategy.
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2. With measures covering the four perspectives in the Balanced Scorecard,

there is a greater chance of attaining goal congruence.
Your Turn
3. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
4. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
5. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
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Q&A LIST
1.
2.
3.
4.
5.
KEYWORDS INDEX
Balanced Scorecard Financial Perspective Process Productivity
Customer Perspective Lag Measures Process Quality Yield
Delivery Cycle Time Lead Measures Process Time
Delivery Performance Measures Learning & Growth Perspective Queue Time
External Measures Manufacturing Cycle Efficiency Strategic Performance Mgmt.
IB Process Perspective Move Time Subjective Measures
Innovation Nonfinancial Measures Throughput per hour
Inspection Time Non-value Added Time Throughput Time
Internal Measures Objective Measures Value Added Time
Financial Measures Post-sales Service Wait Time
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Course Schedule

Second Exam
1. All online submissions must be in PDF file. STUDENT’S SURNAME_4-5 ULO_B_Check_2
2. Follow sample filename format. Filename STUDENT’S SURNAME_4-5 ULO_B_ Analyze_1
will serve as your guide in your submission. STUDENT’S SURNAME_4-5 ULO_A_ Analyze_2
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Big Picture
to
a. Analyze the budgeting framework and develop a master budget.

b. Distinguish activity-based management from activity-based costing and
traditional-based costing as a managerial tool.
Budgeting for Planning and Control
Big Picture in Focus: ULOa. Analyze the budgeting framework and

develop a master budget.
Metalanguage
In this section, the most essential terms relevant to the study of budgeting for
planning and control and to demonstrate ULOa will be operationally defined to
establish a common frame of reference as to how the texts work in your chosen field
or career. You will encounter these terms as we go through this new lesson. Please
refer to these definitions in case you will encounter difficulty in understanding
concepts.
1. Budget. It is a financial plan for the future based on a single level of activity dealing
with the acquisition and use of resources over specified time period.
2. Budgeting. This is the process of formalizing plans and translating qualitative
narratives into a documented quantitative format. It is the act of preparing a
budget; a process of identifying, gathering, summarizing and communicating
financial and non-financial information about the future activities of the
organization.
3. Master budget. It is a comprehensive financial plan for the year and is made up
of various individual departmental and activity budgets which can be divided into
operating and financial budgets.
4. Operating budget. It is a budget concerned with the income-generating activities
of a firm: sales, production, and finished goods inventories. This budget is
expressed in units and pesos.
5. Financial budget. It is a budget concerned with the inflows and outflows of cash
and with financial position.
6. Cash budget. It details the planned cash inflows and outflows.
7. Goal congruence. It refers to making sure that the personal goals of the
managers are closely aligned with the goals of the organization.
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Essential Knowledge
Careful planning is important to the health of any organization. Failure to plan

can lead to financial disaster. Business managers must know their resource
capabilities and have a plan that details the use of these resources. In this lesson, the
basics of budgeting are discussed, and the traditional master budget and its
components are presented.
THE BUDGETING FRAMEWORK

The budgeting process can range from the informal process undergone by a
small firm, to an elaborately detailed of several months procedure employed by large
firms. The controller of an organization is responsible for directing and coordinating
the overall budgeting process.
Advantages of budgeting:
1. can define specific goals and objectives that can become benchmarks, or
standards of performance, for evaluating future performance
2. forces communication throughout the organization
3. forces management to focus on the future and not be distracted by the daily crises
in the organization
4. can increase the coordination of organizational activities and help facilitate goal
congruence
5. can help management identify and deal with potential bottlenecks or constraints
before they become major problems
6. means of allocating resources
Role of Budgeting in Management Functions

Planning–the cornerstone of good management, involves developing objectives and
goals for the organization, as well as the actual preparation of budgets
o relate to organizations long-term goal to its short-term activities
o distribute resources and workloads
o communicate responsibilities
o select performance measure
o set goals for bonuses and rewards
Plans identify objectives and the actions needed to achieve them. Budgets are
the quantitative expressions of these plans. When used for planning, a budget is a
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method for translating the goals and strategies of an organization into operational
terms.
Operating–involves day-to-day decision making which is often facilitated by budgeting

Execution: 1) communicate expectations 2) measure performance and motivate
employees 3) coordinate activities and allot resources
Control–involves ensuring that the objectives and goals developed by the

organization are being attained; often involves a comparison of budgets to actual
performance and the use of budgets for performance evaluation purposes
Reporting: 1) communicate budget information 2) provide continuous feedback
3) support operating decisions
Reviewing: 1) evaluate performance 2) determine timeliness 3) find variances
and create solutions 4) compare planned with actual performance
Control is the process of setting standards, receiving feedback on actual

performance, and taking corrective action whenever actual performance deviates
materially from planned performance. Thus, budgets can be used to compare actual
outcomes with planned outcomes, and they can steer operations back on course, if
necessary.
Basic Concepts
1. Budgets should start with a top-down strategic plan that guides and integrates the
whole company and its individual budgets.
2. Budgeting is a management task, not a mechanical bookkeeping task which
requires a great deal of thoughtful planning and input from a broad range of
managers in a company.
3. Budgets are used throughout planning, operating and control activities.
4. Budgets are future oriented and make extensive use of estimates and forecasts.
5. Flexible budgets are based on the actual number of units produced rather than the
budgeted units of production.
6. Zero-based budgets require managers to build budgets from the ground up each
year.
7. Although we typically think of budgets as being prepared annually, changing
expectations often require that budgets be revised frequently.
Behavioral Implications of Budgeting

When budgets are used for both planning and control purposes, conflicts may be
inevitable. If managers are evaluated and compensated according to whether they
“meet the budget,” they may have incentives to pad the budget, thus making the
targets easier to reach. This may lead to unethical behaviors and is clearly not
beneficial for the company as a whole. Companies can either take punitive actions or
more positive steps such as assuring managers that performance evaluation will be
done in a fair and equitable manner and will include other factors.
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Budgetary control-an act of using budgets to control an organization’s activity
Budgetary slack–an intentional underestimation of revenues and/or overestimation

of expenses in a budgeting process; a technique applied by several operating
managers in order to report favorable variances
Budget Models
Static Budgeting–costs and expenses are not segregated to fixed and variable
components and the budgeted costs, without adjustments to actual capacity, serve as
the basis in evaluating actual performance
Flexible Budgeting–costs and expenses are segregated to fixed and variable
components giving way to the determination of estimated costs based on actual
capacity
Continuous (rolling) Budgeting–a time frame is maintained (i.e. 12 months, 6
months, etc.) and when a segment in a budgeted time frame expires and is dropped,
a new segment is to be added to maintain the same time frame.
Imposed Budgeting–budgets are prepared by top management with little or no inputs
from operating personnel
Participatory Budgeting–budgets are developed through joint decision making by
top management and operating personnel
Program Budgeting–an approach that relates resource inputs to service outputs; it
generally starts by defining the objectives by output results rather than in terms of
quantity of input activities
Zero-based Budgeting–activities to be incurred are to be prioritized based on its
order of relevance in line with a defined goal in the coming period without regard to
past experiences or present condition
Life-cycle Budgeting–costing is done over the entire life span of a product starting
from its period of conception (e.g. research and development), to infancy (e.g. product
introduction), growth (e.g. acceptance), expansion, up to maturity (or decline); it
includes all costs expected to be incurred in the research and development, design,
commercial production, marketing, channels of distribution, customer services, and
post-sales services of a product to determine the most strategic price for market
dominance, saturation or influence
Static vs. Flexible Budgets

1. Static budgets are set at the beginning of the period and remain constant. They
are useful for planning and operating purposes, but can be problematic when used
for control. Control requires the comparison of actual outcomes with desired
outcomes. When static budgets are used and actual sales are different from
budgeted sales, a comparison is inaccurate.
2. Flexible budgets take differences in cost due to volume differences out of the
analysis by budgeting based on actual production. They can be accurately used
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for control purposes because any differences in cost caused by differences in

volume of production have been removed.
The Budget Committee (Management Committee or Executive Committee)–primarily

responsible in developing and institutionalizing budgetary systems and processes;
consists of key functional and process executives such as the finance manager,
production manager, human resource manager, purchasing manager, quality control
manager, information resource manager, design and engineering manager, logistics
manager and others
Budget Manual–a detailed set of information and guidelines about the budgetary
process; includes 1)statement of budgetary purpose and its desired results 2) a listing
of specific budgetary activities to be performed 3) a calendar of scheduled budgetary
activities 4) sample budgetary forms, and 5) original, revised and approved budgets
Master Budget–the comprehensive set of budgets, budgetary schedules and pro
forma organizational financial statements, the components of which are as follows:
Operating Budgets Financial Budgets
Sales Budget Balance Sheet Budget
Inventory Budget Statement of Cash Flows Budget
Production Budget Statement of Changes in Owners’ Equity Budget
Materials Purchases Budget Schedules of receivables, payables, accruals and
deferrals
Direct Labor Budget
Factory Overhead Budget
Selling and Administrative Budget
Income Statement
Budgeting for Sales

1. All organizations require the forecasting of future sales volume and the preparation
of a sales budget.
2. The sales forecast and the sales budget are the starting points in the preparation
of production budgets for manufacturing companies.
Factors in Forecasting Sales

1. Historical data, such as sales trend, competitors, and the industry
2. General economic trends or factors, such as inflation rates, interest rates,
population growth, and personal spending levels
3. Regional and local factors expected to affect sales
4. Anticipated price changes in both purchasing costs and sales prices
5. Anticipated marketing or advertising plans
6. The impact of new products or changes in product mix on the entire product line
7. Other factors, such as political and legal events and weather changes
All the remaining budgets and the decisions that are made based on their
forecasts are dependent upon this estimate of sales. It is important to estimate sales
with as much accuracy as possible. A small error in a sales forecast can cause larger
errors in other budgets that depend on the sales forecast.
Exercise: Developing a Master Budget Try doing this yourself.
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The Crown Company is preparing budgets for the quarter ending June 30.
Budgeted sales for the next five months are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units
The selling price is P10 per unit.
Sales budget
Month 1 Month 2 Month 3 Total
Sales in units
X selling price (SP)
Production budget
The management at Crown Company wants ending inventory to be equal to 20% of the
following month’s budgeted sales in units. On March 31, 4,000 units were on hand.
Month 1 Month 2 Month 3 Month 4
Budgeted Sales
Add: Desired
Ending Inventory
Total units needed
Less: Beg. Inv.
Req. production
Direct materials budget and its cash disbursement budget

At Crown Company, five pounds of materials are required per unit of product. Management
wants materials on hand at the end of each month equal to 10% of the following month’s
production. On March 31, 13,000 pounds of material are on hand. Material cost is P0.40 per
pound. One-half of a month’s purchases is paid for in the month of purchase; the other half
is paid in the following month. The March 31 accounts payable balance is P12,000.
Req. production
Mat’ls needed/unit
Total req. mat’ls
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Add: Desired E/Inv.
Total mat’ls
needed
Less: Beg. Inv.
Mat’ls purchased
X purchase price
Total purchased
cost
Payment made
Direct labor budget and its cash disbursement budget

At Crown Company, each unit of product requires 0.05 hours (3 minutes) of direct labor. In
exchange for the “no layoff” policy, workers agree to a wage rate of P10 per hour regardless
of the hours worked (NO overtime pay).
Req. production
Hours needed/unit
Total Hours Req.
X labor rate
Total labor budget

cost
Factory overhead budget and its cash disbursement budget

At Crown Company, manufacturing overhead is applied to units of product on the basis of
direct labor hours. The variable manufacturing overhead rate is P20 per direct labor hour.
Fixed manufacturing overhead is P50,000 per month and includes P20,000 of noncash costs
(primarily depreciation of plant assets).
Budg. Hours Req.
X VOH rate
Variable FOH
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Fixed FOH
Total FOH cost
Less: Non-cash cost
Cash Disbursement
for FOH
Ending finished goods inventory budget

Production Cost Quantity needed/unit Cost/unit TC/unit
Direct Materials
Direct Labor
FOH
Product Cost per unit
Ending inventory (units) xx

X unit production cost xx
Ending Finished Goods xx
Selling and administrative budget

At Crown Company, the selling and administrative expenses budget is divided into variable
and fixed components. The variable selling and administrative expenses are P0.50 per unit
sold. Fixed selling and administrative expenses are P70,000 per month. The fixed selling and
administrative expenses include P10,000 in costs – primarily depreciation – that are not cash
outflows of the current month.
Budgeted sales
X VS&A rate
VS&A expenses
Fixed S&A
Total S&A
Less: non-cash
costs
Cash disbursement
Cash collection budget
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All sales are on account. Crown’s collection pattern is: 70% collected in the month of sale,
25% collected in the month following sale, 5% uncollectible. The March 31 accounts
receivable balance of P30,000 will be collected in full.
Cash budget
The beginning cash balance for March 31 is P350,000. Dividend declared and paid are:
P15,000, P17,000 and P20,000 for the month of April, May and June, respectively.
Beg. Cash balance
Add: cash
collections
Total cash available
Less: cash
disbursements
D-Materials
D-Labor
FOH
S&A
Dividend
Excess (deficiency)
Add (deduct):
Financing
Add: Borrowing
Less: Interest
Ending Cash
Balance
Let’s Check
1. Which of the following is not a primary purpose of preparing a budget?
a. To make sure the company expands its operation.
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b. To provide a basis for comparison of actual performance.

c. To communicate the company’s plans throughout the entire business
organizations.
d. To control income and expenditures in a given period.
2. These statements are proper to the budgeting process except

a. It is a part of management’s responsibility to plan the use of its resources.
b. Actual results need not be compared with plan, since the process ends after
the budget is approved.
c. It is a tool to orchestrate of various levels of individuals in the company is
necessary to gain acceptance and attain its goals.
d. The involvement of various levels of individuals in the company is necessary
to gain acceptance and attain its goals.
3. The starting point in the preparation of an annual as well as monthly master budget
prepared by the Budget Committee is the
a. Cash budget c. Balance sheet budget
b. Production budget d. Sales budget
4. A planning calendar in budgeting is the

a. calendar period covered by the budget
b. schedule of activities for the development and adoption of the budget
c. calendar period covered by the annual budget and the long-range plan
d. sales forecast by months in the annual budget period
5. Budgetary slack can best be described as

a. the elimination of certain expenses to enhance budgeted income.
b. the planned overestimation of budgeted expenses.
c. a plug number used to achieve a preset level of operating income.
d. the planned underestimation of budgeted expenses.
6. In a master budget plan, sales forecast is under

a. Financial budget c. Performance budget
b. Operating budget d. Capital budget
7. Which of the following is normally included in the financial budget of firm?

a. Direct materials budget c. Budgeted balance sheet
b. Selling expenses budget d. Sales budget
8. Which one of the following items is the last schedule to be prepared in the normal
budget preparation process?
a. Cost of goods sold budget c. Selling expense budget
b. Manufacturing overhead budget d. Cash budget
9. Which of the following may be considered an independent item in the preparation

of the master budget?
a. Ending inventory budget
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b. Capital investment budget

c. Pro-forma statement of financial position
d. Pro-forma income statement
10. This budgeting system places the burden of proof on the manager to justify
authority to spend any money whether or not there was spending in the previous
period. Different ways of performing the same activity and different levels of effort
for the activity is evaluated. This system is called
a. Scenario
b. Zero-based budgeting
c. Budgeting by alternatives
d. Budgeting by responsibility and authority
11. The budgeting tool or process in which estimates of revenues and expenses are
prepared for each product beginning with the product’s research and development
phase and traced through to its customer support phase is a(n)
a. Master budget c. Life-cycle budget
b. Activity-based budget d. Zero-based budget
12. The budget that describes the long-term position, goals, and objectives of an entity
within its environment is the
a. Capital budget c. Cash management budget
b. Operating budget d. Strategic budget
13. Budget that are prepared for various degree of plant operations and are used to
control costs at different levels of productive capacity is
a. Operating budget c. Flexible budget
b. Rolling budget d. Out-of-pocket costs
14. A systematized approach known as zero-based budgeting

a. classifies the budget by the prior year’s activity and estimates the benefits
arising from each activity
b. commences with either the current level of spending or projected whichever is
lower.
c. presents planned activities for a period of time but does not present a firm
commitment
d. divides the activities of individual responsibility centers into a series of
packages that are prioritized
15. In flexible budget, when production levels are expected to decline within a relevant
range, the effects would be
a. Increase in both fixed and variable costs per unit.
b. Increase in fixed costs per units only
c. Decrease in fixed costs per unit only
d. No effect on both fixed and variable costs per unit.
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Let’s Analyze
Activity 1. Now, it’s your turn to apply your skill in preparing the components of the
master budget.
Problem 1 (adapted)
Lydia Company manufactures a single product. It keeps its inventory of finished goods
at twice the coming month’s budgeted sales and inventory of raw materials at 150%
of the coming month’s budgeted production. Each unit of product requires five pounds
of materials, which cost P3 per pound. The sales budget is, in units: May, 10,000;
June, 12,400; July, 12,600; August, 13,200.
Required:
1. Compute the budgeted production for June.
2. Compute the budgeted production for July.
3. Compute budgeted material purchases for June in pounds and pesos.
Problem 2 (adapted)
Conchita Company has the following information:
Month Budgeted Sales
March P 50,000
April 53,000
May 51,000
June 54,500
July 52,500
In addition, the gross profit rate is 40% and the desired inventory level is 30% of next
month’s cost of sales.
Required: Prepare a purchases budget for April and May.
Problem 3 (adapted)
Ramon Manufacturing has a cash balance of P8,000 on August 1 of the current year.
The company’s controller forecast the following cash receipts and cash disbursements
for the upcoming two months of activity.
Receipts Payments
August P 45,000 P 57,000
September 66,000 56,000
Management desires to maintain a minimum cash balance of P8,000 at all times. If
necessary, additional financing can be obtained in P1,000 multiples at a 12% interest
rate. All borrowings are made at the beginning of the month; debt retirement, on the
otherhand, occurs at the end of the month. Interest is paid at the time of repaying loan
principal and is computed on the portion of debt repaid.
Required:
1. Determine the ending cash balance in August both before and after any
necessary financing or debt retirement.
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2. Repeat part “1” for September.
Problem 4 (adapted)
Dante Manufacturing has a cash balance of P8,000 on August 1 of the current year.
The company’s controller forecast the following cash receipts and cash disbursements
for the upcoming two months of activity.
Purchases Sales
January P 142,000 P 172,000
February 148,000 166,000
March 136,000 165,000
April 154,000 178,000
May 160,000 166,000
Customers pay 60% of their balances in the month of sale, 30% in the month following
sale, and 10% in the second month following sale. The company pays all invoices in
the month following purchase and takes advantage of a 3% discount on all amounts
due. Cash payments for operating expenses in May will be P119,500; Crispin’s cash
balance on May 1 was P127,800.
Required: Determine the following:
1. Expected cash collections during May.
2. Expected cash disbursements during May.
3. Expected cash balance on May 31.
Problem 5 (adapted)
Fernando Company developed the following data for the month of August:
1. August 1 cash balance P123,000.
2. Cash sales in August P800,000.
3. Credit sales for August are P300,000; for July P400,000; and for June
P400,000. 70% of credit sales are collected in the month of sale, 15% in the
following month, and 10% in the second month following the sale.
4. Purchases for July were P500,000 and for August are P400,000. One-fourth of
purchases are paid in the month of purchase and the remaining three-quarters
in the following month.
5. August salaries are P314,000, utilities are P32,200, and depreciation on the
building and equipment is P100,000.
Required:
1. Anticipated cash receipts from accounts receivable in August.
2. Anticipated total cash available from all sources in August.
3. August cash payments for purchases made in July and August.
4. Anticipated cash balance on August 31.
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In a Nutshell
Activity 1. To further develop your skills in the preparation of an operating
budget and a cash budget, a practice set is attached in your LMS for you
to do. You will be graded on this activity based on the rubrics provided in
the syllabus.
Q&A LIST
1.
2.
3.
4.
5.
KEYWORDS INDEX
Budgetary Control Factory Overhead Budget Operating Budget
Budgetary Slack Financial Budget Participatory Budgeting
Budget Manual Flexible Budgeting Production Budget
Cash Budget Imposed Budgeting Program Budgeting
Cash Collection Budget Inventory Budget Sales Budget
Cash Disbursement Budget Life-cycle Budgeting Selling and Admin Budget
Continuous Budgeting Master Budget Static budgeting
Direct Labor Budget Material Purchases Budget Zero-based Budgeting
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Activity-based Management
Big Picture in Focus: ULOb. Distinguish activity-based management

from activity-based costing and traditional costing.
Metalanguage
In this section and in order to demonstrate ULOb, the most essential terms
relevant to the study of activity-based management will be operationally defined. You
will encounter these terms as we go through this new lesson. Please refer to these
definitions in case you will encounter difficulty in understanding related terms and
concepts.
1. Traditional costing. This is a costing method that uses a traditional unit-level

base.
2. Activity-based costing. This is a costing method of allocating indirect factory
overhead, indirect selling and indirect administrative expenses.
3. Activity-based management. This a systemwide, integrated approach that
focuses management’s attention on activities with the objectives of improving
customer value and increasing the profit achieved by providing this value.
4. Continuous improvement. Improving performance by constantly searching for
ways to eliminate waste.
5. Value-added activities. These activities contribute to customer value or help
meet an organization’s needs or both.
6. Non-value added activities. These are those that are not necessary and not
valued by both, internal and external, customers.
Essential Knowledge
ACTIVITY-BASED COSTING (ABC)

-the major source of information for activity-based management
Advantages: accuracy; better cost information (more precise, reliable and

informative); continuous improvement (better cost control and more efficient
operations)
Limitations: costly; product costing does not conform with GAAP
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ABC is applicable to organizations with products or services that

vary significantly in volume, have diversified activities and complexity of
operations
relatively high overhead costs
have undergone major technological or design change
ABC provides cost information on indirect costs with the use of activity drivers.
Specifically, it is a method of allocating indirect factory overhead, indirect selling and
indirect administrative expenses.
Cost object–the item for which managers want cost information

Activity driver–measure the capacity of an activity and its output
Examples:
materials handling may be measured by the number of moves
shipping goods may be measured by units sold
laundering hospital linen may be measured by the pounds of laundry
Cost drivers per production event (cost pool):
Unit-level direct labor hours, machine hours
Batch-level material moves, set-up hours, number of orders, tooling hours,
inspection hours, machine realignment and cleaning, scheduling
Production-level design hours, testing hours, advertising, prototyping
Facility-level number of personnel, area occupied, kilowatt hours, life in years,
maintenance hours
The ABC Process

1. Set-up the ABC System
2. Identify the resource drivers
3. Identify the activity drivers
4. Group similar or homogenous activities (specific activity driver)
5. Estimate costs based on their cost-driver or activity-driver
Let us recall that:

Under a traditional costing, cost behavior is assumed to be described by unit-based
drivers only.
Under activity-based costing, both unit and non-unit-based drivers are used, thus,
provides much richer view of cost behavior.
Computing the Overhead Rate

Traditional Costing Activity-Based Costing
OH Rate = Budgeted FOH OH Rate = Budgeted FOH
Traditional Base Cost Driver
Traditional Base:
DLH, machine hours, number of units produced,
direct labor in peso
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Illustration (7-1): Activity-Based Costing vs. Traditional Costing

(adapted)
Cacay Company has two products with the following information:
Product X Product Y
Direct materials P10.00 P20.00
Direct labor 20.00 30.00
Units produced 8,000 2,000
Machine hours 16,400 3,600
Inspection hours 300 2,700
Inspection cost, P4,500,000
Inspection costs are classified as indirect costs and to be allocated between products
A and B. Traditionally the company uses machine hours to allocate indirect costs.
Based on a cause-and-effect study, the cost driver of inspection costs is the number
of inspection hours.
Required:
1. Factory overhead rate using traditional costing
2. Factory overhead rate using activity-based costing
3. Assuming no other indirect costs, determine the following for each product:
a. unit cost under the traditional costing method
b. unit cost under the activity-based costing method
c. difference in unit costs under the traditional costing and activity-based
costing methods
d. effects of the mis-costing under the traditional costing system
Solution:
1. Traditional costing
FOH rate = Budgeted FOH = P4,500,000 = P4,500,000 = P225/MH
Traditional Base 16,400 + 3,600 20,000 MH
2. Activity-based costing
FOH rate = Budgeted FOH = P4,500,000 = P4,500,000 = P1,500/hr
Cost Driver 300 + 2,700 3,000 hrs
3. Traditional costing vs. Activity-based costing

Product X Traditional Costing Activity-based Costing
Direct materials 10 10
Direct labor 20 20
Overhead per unit
(16,400 MH x P225/MH) 461.25
8,000 units
(300 hrs x P1,500/hr) 56.25
8,000 units
Total Unit Cost P491.25 P86.25
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Product Y Traditional Costing Activity-based Costing

Direct materials 20 20
Direct labor 30 30
Overhead per unit
(3,600 MH x P225/MH) 405
2,000 units
(2,700 hrs x P1,500/hr) 2,025
2,000 units
Total Unit Cost P455 P2,075
Product X Product Y
Difference
P491.25 – P86.25 P405
P455 – P2,075 (P1,620)
Effects on
Unit Cost Overstated by P405 Understated by P1,620
Profit Understated Overstated
ACTIVITY-BASED MANAGEMENT (ABM)

Activity-based management is more comprehensive than an ABC system. ABM
adds a process view to the cost view of ABC. ABM is anchored on the importance of
processes in achieving organizational goals through continuous improvement.
Processes are composed of activities that are tied-up to specific objectives. Thus,
improving processes for the attainment of these objectives requires improving the
ways of accomplishing related activities. Contrary to the traditional approach, ABM
focuses on managing these activities, instead of costs, as an effective control
measure. The ABM concept has two dimensions: cost and process.
cost dimension
-provides cost information about resources, activities, and cost objects of interests
such as products, customers, suppliers, and distribution channels
Objective: improving the accuracy of cost assignments
ABC is the main source of cost information needed in ABM.
process dimension
-provides information about what activities are performed, why they are performed,
and how well they are performed
-provides the means to pursue and measure continuous improvement
Objective: cost reduction
To understand how the process view connects with continuous improvement, a more
explicit understanding of process value analysis is needed.
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PROCESS VALUE ANALYSIS (PVA)

-fundamental to activity-based responsibility accounting
-focuses on accountability for activities rather than costs
-emphasizes the maximization of systemwide performance instead of individual
performance
Concerned with the following:

1. driver analysis (defining root causes)
what factors cause activities to be performed
what causes activity costs to change
2. activity analysis (identifying, describing and assessing value content)

what activities are performed
how many people perform the activities
time and resources required to perform the activities
value of the activities to the organization (classifying activities into value-
added or non-value-added)
value-added activities-those activities that contribute to customer value or help

meet an organization’s needs, or both
activities that comply with legal mandates
discretionary activity that meets all three of the following conditions:
(1) the activity produces a change of state,
(2) the change of state was not achievable by preceding activities, and
(3) the activity enables other activities to be performed.
determining whether or not a discretionary activity is value-added
-more of an art than a science and depends on subjective judgment
non-value-added activities (manufacturing): scheduling, moving, waiting,

inspecting and storing
3. performance measurement (assessing activity performance)

-measures are both financial and nonfinancial
-major dimensions:
a. efficiency-relationship of activity outputs to activity inputs
b. quality-doing the activity right the first time it is performed
c. time-longer time usually mean resource consumption and less ability to
respond to customer demand
Financial Measures of Activity Efficiency

(1) value-added and non-value added activity costs
(2) trends in activity costs
(3) kaizen standard setting
(4) benchmarking
(5) activity flexible budgeting
(6) activity capacity management
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Overall Objective of ABM: To improve a firm’s profitability by

1. improving decision making through providing accurate cost information (ABC)
2. reducing costs through encouraging and supporting continuous improvement efforts
(PVA)
Implementing Activity-Based Management
ABM Model
Systems Planning
Identify, Define & Classify

Activities
PVA ABC
Assess Value Content of Assign Resource Cost

Activities (Activities)
Define Root Cause per Identify Cost Objects and

Activity Activity Drivers
Reduce Improve
Costs Decision
Establish Activity
Calculate Activity Rates
Performance Measures
Increase
Search for Improvement Profitability Assign Costs to Cost
Opportunities Objects
Figure 8. ABM Implementation Model
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Let’s Check
1. A base used to allocate the cost of a resource to the different activities using that
resource is a(n)
a. resource driver c. final cost object
b. activity driver d. none of the above
2. A base used to allocate the cost of products, customers or other final cost objects
is a(n)
a. resource driver c. final cost object
c. activity driver d. none of the above
3. Examples of batch-level costs are:

a. portions of electricity and indirect materials
b. salaries of schedulers and setup personnel
c. salaries of designers and programmers
d. depreciation and insurance on buildings
4. Examples of activities at the product-level of costs include:

a. scheduling, setting up and moving
b. designing, changing and advertising
c. heating, lighting and security
d. cutting, painting and packaging
5. Examples of unit-level activity drivers include:

a. number of batches and material moves
b. square footage occupied
c. number of products and design changes
d. units of output and direct labor hours
6. Plant-level costs are costs that

a. are incurred to support the number of different products produced.
b. are incurred to sustain the capacity at a production site.
c. inevitably increase whenever a unit is produced.
d. are caused by the number of batches produced and sold.
7. Traditional costing systems are characterized by their use of which of the following
measures as bases for allocating overhead to ouput
a. unit-level drivers c. product-level drivers e. none of the above
b. batch-level drivers d. plant-level drivers
8. ABC systems are characterized by their use of which of the following measures
as bases for allocating overhead to output
a. unit-level drivers c. product-level drivers e. none of the above
b. batch-level drivers d. plant-level drivers
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9. Activity-based management (ABM) is

a. a costing system in which multiple overhead cost pools are allocated using
bases that include one or more nonvolume related factors
b. a based used to allocate the cost of a resource to the different activities using
it
c. the use of information obtained from ABC to make improvement in the firm
d. a base used to allocate the cost of an activity to products and customers
10. All of the following are examples of non-value-added activities except

c. ordering c. assembling e. setting-up
d. receiving d. inspections
Let’s Check
Activity 2. Listed below are potential activity drivers. Identify the most likely level of
each activity driver. On the space provided for, write U (unit-level); B (batch-level); or
P (product-level).
_____1. Loads of materials moved _____6. Number of setups
_____2. Direct materials dollars _____7. Number of work orders
_____3. Marketing promotions _____8. Machine hours
_____4. Number of design changes _____9. Number of part number
_____5. Design hours _____10. Pounds of product
Let’s Analyze
Activity 1. Now, it’s your turn to apply activity-based costing. Read each problem
carefully and provide what is required.
Problem 1 (adapted)
Kai Corp. manufactures two models of beds, the standard and the deluxe model.
The following activity and cost information has been compiled:
Standard Deluxe OH Costs
No. of setups 9 21 P 90,000
No. of components 90 150 210,000
No. of DLH 650 150
Required:
Compute the total amount of overhead costs assigned to each model using:
1. Traditional costing system
2. Activity-based costing system
3. Discuss the effects of the difference in the computed amounts of overhead
costs.
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Problem 2 (adapted)
Aguila Company has two major segments with the following information:
Skyscraper Ground Zero Total
Annual Revenue P200,000 P600,000 P800,000
Annual Salesperson Salaries P30,000 P45,000 P75,000
Number of Customers 50 75 125
Miles Driven 80,000 40,000 120,000
The business also has overhead costs as follows:

Cost pool Cost in pool Cost driver
Travel P36,000 miles driven
Entertainment P144,000 number of customers
Administrative P150,000 salaries
TOTAL P330,000
Required:
1. Allocate the overhead costs to the segments based on sales revenue.
2. Determine the income of each segment.
3. Allocate the overhead costs to the segments using ABC.
4. Determine the income of each segment under ABC.
In a Nutshell
Activity 1. Distinguish activity-based management from activity-based costing and
traditional costing as a managerial tool. List down their differences and similarities.
1. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
2. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
3. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
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Q&A LIST
1.
2.
3.
4.
5.
KEYWORDS INDEX
Activity-based costing Continuous improvement Process value analysis
Activity-based management Cost pools Traditional costing
Activity drivers Non-value added activities Value-added activities
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Course Schedule

Third Exam
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Big Picture
to
a. Define quality, describe the four types of quality costs and explain how
environmental costs can be measured and reduced.
b. Discuss the just-in-time (JIT) inventory management and define the theory of
constraints as used to manage inventory.
c. Describe the basics of lean manufacturing and accounting.
Quality and Environmental Cost Management
Big Picture in Focus: ULOa. Define quality, describe the four types of
quality costs and explain how environmental costs can be measured
and reduced.
Metalanguage
In this section and in order to demonstrate ULOa, the most essential terms
relevant to the study of quality and environmental cost management will be
operationally defined. You will encounter these terms as we go through this new
lesson. Please refer to these definitions in case you will encounter difficulty in
understanding related terms and concepts.
1. Quality. This is referred as the degree or grade of excellence. Therefore, it is a

relative measure of goodness.
2. Quality product or service. It is one that meets or exceeds customer
expectations.
3. Customer expectations. This relate to attributes such as product performance,
reliability, durability, and fitness for use.
4. Quality specification. It is the specific level of performance planned for a given
quality attribute. Customers expect a quality product or service to perform
according to specifications.
5. Quality of conformance. It is a measure of how a product meets its
specifications.
6. Defective product. It is one that does not conform to specifications.
7. Zero defects. It means that all products conform to specifications.
Essential Knowledge
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There are numerous quality-related activities, all of which consume resources that
determine the level of quality costs incurred by a firm. Inspecting or testing parts, for
example, is an appraisal activity that has the objective of detecting bad products.
Detecting bad products and correcting them before they are sent to customers is
usually less expensive than letting them be acquired by customers. The objective of
quality cost management is to find ways to minimize total quality costs.
Competitive forces are requiring firms to pay increasing attention to quality. Customers
are demanding higher-quality products and services. Improving quality may actually
be the key to survival for many firms. Improving process quality and the quality of
products and services is a fundamental strategic objective that is part of any well-
designed Balanced Scorecard. If quality is improved, then customer satisfaction
increases; if customer satisfaction increases, then market share will increase; and if
market share increases, then revenues will increase. Thus, improving quality can
enhance a firm’s financial and competitive position.
Defining Quality Costs

Quality-linked activities are those activities performed because poor quality may or
does exist. The costs of performing these activities are referred to as costs of quality.
Costs of quality-costs that exist because poor quality may or does exist; incurred to
prevent defects or incurred as a result of defects occurring
Subcategories of quality-related activities:

a. Control activities-performed by an organization to prevent or detect poor quality
(because poor quality may exist). Control activities are made up of prevention and
appraisal activities.
b. Failure activities-performed by an organization or its customers in response to
poor quality (poor quality does exist). If the response to poor quality occurs before
delivery of a bad (nonconforming, unreliable, not durable, and so on) product to a
customer, the activities are classified as internal failure activities; otherwise, they
are classified as external failure activities.
Four Categories of Quality Costs

Control costs-costs of performing control activities; also considered as conformance
costs incurred to keep defective products from falling into the hands of customers
1. Prevention costs are incurred to prevent poor quality in the products or

services being produced. As prevention costs increase, we would expect the
costs of failure to decrease.
2. Appraisal costs are incurred to determine whether products and services are
conforming to their requirements or customer needs.
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Failure costs-costs incurred by an organization because failure activities are

performed; also considered as non-conformance costs incurred because defects are
produced despite efforts to prevent them
3. Internal failure costs are incurred because products and services do not
conform to specifications or customer needs. This nonconformance is detected
prior to being shipped or delivered to outside parties. These are the failures
detected by appraisal activities. These costs disappear if no defects exist.
4. External failure costs are incurred because products and services fail to
conform to requirements or satisfy customer needs after being delivered to
customers. Of all the costs of quality, this category can be the most devastating.
External failure costs, like internal failure costs, disappear if no defects exist.
Examples of Quality Costs

Prevention Costs Appraisal Costs
quality engineering inspection and testing of materials
quality training programs packaging inspection
quality planning supervising appraisal activities
quality reporting product acceptance
supplier evaluation and selection process acceptance
quality audits field testing
quality circles outside certification
field trials continuing supplier verification
design reviews
recruiting
marketing research
prototype inspection
vendor certification
Internal Failure Costs External Failure Costs
scrap recalls
rework lost sales (performance-related)
downtime (due to defects) returns and allowances (poor quality)
reinspection discounts due to defects
retesting warranties
design changes repair
repairs product liability
customer dissatisfaction
lost market share
complaint adjustment
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Environmental Costs
Historically, firms have often released contaminants into the atmosphere and water
without bearing the full cost of such activities. Many people believe that polluters
should bear the full cost of any environmental damage caused by production of goods
and services. By bearing the full cost, firms may then seek more ecoefficient
production methods.
Ecoefficiency
-the ability to produce competitively priced goods and services that satisfy customer
needs while simultaneously reducing negative environmental impacts, resource
consumption, and costs
-means producing more goods and services using less materials, energy, water, and
land, while, at the same time, minimizing air emissions, water discharges, waste
disposal, and the dispersion of toxic substances
Interestingly, some initial experiences suggest that it may be possible to improve

environmental quality without reducing useful goods and services while
simultaneously increasing profits.
Damage to environment-defined as either direct degradation of the environment such

as the emission of solid, liquid, or gaseous residues into the environment (e.g., water
contamination and air pollution) or indirect degradation such as unnecessary usage of
materials and energy
Environmental costs
-referred to as environmental quality costs that are incurred because poor
environmental quality exists or may exist
-associated with the creation, detection, remediation, and prevention of environmental
degradation.
Four categories of environmental costs:

1. Environmental prevention costs are the costs of activities carried out to
prevent the production of contaminants or waste that could cause damage
to the environment.
2. Environmental detection costs are the costs of activities executed to
determine if products, processes, and other activities within the firm are in
compliance with appropriate environmental standards.
3. Environmental internal failure costs are costs of activities performed
because contaminants and waste have been produced but not discharged
into the environment. Thus, internal failure costs are incurred to eliminate
and manage contaminants or waste once produced.
4. Environmental external failure costs are the costs of activities performed
after discharging contaminants and waste into the environment. External
failure costs can be subdivided into:
a. Realized external failure costs-incurred and paid for by the firm
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b. Unrealized external failure (societal) costs-caused by the firm but

are incurred and paid for by parties outside the firm. Societal costs
can be further classified as (1) those resulting from environmental
degradation and (2) those associated with an adverse impact on the
property or welfare of individuals. In either case, the costs are borne
by others and not by the firm even though the firm causes them.
Of the four environmental cost categories, the external failure category is the most
devastating. Within the external failure cost category, societal costs are labeled with
an “S.” The costs for which the firm is financially responsible are called private costs.
All costs without the S label are private costs.
Environmental Cost Reduction

Investing more in prevention and detection activities can bring about a significant
reduction in environmental failure costs.
Environmental costs appear to behave in much the same way as quality costs. The
lowest environmental costs are attainable at the zero-damage point much like the
zero-defects point of the total quality cost model. Thus, an ecoefficient solution would
focus on prevention with the usual justification that prevention is cheaper than the
cure. Analogous to the total quality management model, zero damage is the lowest
cost point for environmental costs.
Let’s Check
Activity 1. Now that you know the most essential terms in the study of quality and
environmental cost management, let us try to check your recollection of these terms.
In the spaces provided below, write the missing terms to complete the following
statements:
1. _______________ relate to attributes such as product performance, reliability,

durability, and fitness for use.
2. _______________ are costs incurred to prevent poor quality in the products or
services being produced.
3. _______________ are costs incurred because defects are produced despite
efforts to prevent them.
4. _______________ are the costs of activities executed to determine if products,
processes, and other activities within the firm are in compliance with appropriate
environmental standards.
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5. _______________ is the ability to produce competitively priced goods and

services that satisfy customer needs while simultaneously reducing negative
environmental impacts, resource consumption, and costs.
Let’s Check
Activity 2. Classify each of the following quality costs as prevention costs, appraisal
costs, internal failure costs or external failure costs.
___________________1. Reentering data because of keypunch errors
___________________2. Technical support provided to suppliers
___________________3. Costs of inspecting raw materials
___________________4. Lost sales arising from a reputation for poor quality
___________________5. Design and engineering costs
Let’s Analyze
Activity 1. You are now familiar with the essential terms related to quality and
environmental cost management. But it is important that you are also able to
confidently discuss the concepts introduced. On the space provided below, please
write a thorough discussion of the required information.
1. Define quality.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
2. Describe the four types of quality costs.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
3. Explain how environmental costs can be measured and reduced.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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In a Nutshell
Activity 1. Based on the definition of the most essential terms in the study of the
quality and environmental cost management and the learning exercises that you have
done so far, please feel free to write your arguments or lessons learned below in
relation to this topic.
1. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
2. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
3. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
4. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
5. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
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Q&A LIST
1.
2.
3.
4.
5.
KEYWORDS INDEX
Appraisal costs Ecoefficiency Prevention costs
Customer expectations Environmental costs Quality
Conformance costs External failure costs Quality product or service
Damage to environment Internal failure costs Quality specification
Defective product Non-conformance costs Zero defects
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Inventory Management
Big Picture in Focus: ULOb. Discuss the just-in-time (JIT) inventory

management and define the theory of constraints as used to
manage inventory.
Metalanguage
In this section, the most essential terms relevant to the study of the just-in-time
inventory management and theory of constraints and to demonstrate ULOb will be
operationally defined to establish a common frame of reference as to how the texts
work in your chosen field or career. You will encounter these terms as we go through
this new lesson. Please refer to these definitions in case you will encounter difficulty
in understanding concepts.
1. Just-in-case inventory management. It is a traditional inventory model based

on anticipated demand.
2. Just-in-time inventory management. It is a contemporary inventory model in
which purchases and production of materials, parts and subcomponents are
scheduled so that items are available just when needed for production, not earlier
and not later. There is zero inventories.
3. Ordering costs. These are the costs of placing and receiving an order. Examples
include the costs of processing an order (clerical costs and documents), insurance
for shipment, and unloading costs.
4. Setup costs. These are the costs of preparing equipment and facilities so they
can be used to produce a particular product or component. Examples are wages
of idled production workers, the cost of idled production facilities (lost income), and
the costs of test runs (labor, materials, and overhead).
5. Carrying costs. These are the costs of holding inventory. Examples include
insurance, inventory taxes, obsolescence, the opportunity cost of funds tied up in
inventory, handling costs, and storage space.
6. Stock-out costs. are the costs of not having a product available when demanded
by a customer. Examples are lost sales (both current and future), the costs of
expediting (increased transportation charges, overtime, and so on), and the costs
of interrupted production.
7. Economic order quantity. It is a mathematical approach to compute order size
(number of units to order) to minimize the annual sum of the inventory carrying
cost and ordering cost.
Essential Knowledge
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INVENTORY POLICIES
Inventory policy can be used to reduce costs and help organizations strengthen their
competitive position. Just-in-case inventory management provides the necessary
background for grasping the advantages of inventory management methods that are
used in the contemporary manufacturing environment. These methods include JIT and
the theory of constraints.
Just-In-Case Inventory Management

Inventory management is concerned with managing inventory costs.
Three types of inventory costs:

(1) the cost of acquiring inventory (other than the cost of the good itself)
(2) the cost of holding inventory
(3) the cost of not having inventory on hand when needed
If the inventory is a material or good acquired from an outside source, then these
inventory-acquisition costs are known as ordering costs. If the material or good is
produced internally, then the acquisition costs are called setup costs.
Ordering costs and setup costs are similar in nature—both represent costs that must
be incurred to acquire inventory. They differ only in the nature of the prerequisite
activity (filling out and placing an order versus configuring equipment and facilities).
If demand is not known with certainty, a third category of inventory costs—called stock-
out costs—exists.
Just-In-Time Inventory Management

In the past decade, many companies have focused attention on their inventory
policies. Many have implemented just-in-time (JIT) systems described as follows:
JIT Management
End-goals: speed, accuracy, and cost-effectiveness
Speed in manufacturing cycle time is accomplished with the following:
a. Unqualified support from top management
b. Retention and maintenance of reliable suppliers
c. Most efficient equipment and machinery maintenance program
d. Well-trained, responsible, and quality-oriented personnel
e. Effective and efficient design department
f. Use of statistical quality control techniques
g. Improving plant layout
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JIT Inventory System

Anchored on the premise that
-materials should be received just-in-time they are needed for production, and,
-finished goods are completed just-in-time they are needed by customers
Quality principle states: “the best warehouse is a clean warehouse”

-aims to eventually eliminate warehousing and reduce costs of inventory holding
Fundamental objective: to produce and deliver what is needed, when it is needed,

at all stages of the production process just-in-time to be fabricated, assembled and
shipped to the customer

-Forces strong quality relationship between the supplier, the company and its
customers
-Speeds up delivery to customers at the best possible production quality and
productivity
Benefits:
Lower inventory level
Faster response time
Higher output per input (per employee)
Fewer floor space requirements

PULL SYSTEM: inventories are pulled through production by current demand,
NOT pushed through by anticipated demand
Plant Layout: not designed in functional department process but by manufacturing
cells (group of machines grouped in semicircle)
Worker (@cell): must be able to operated all machines and to perform support
tasks; teamwork; continuously trained; more participation; empowered
Manufacturing cycle time and setup time are reduced.
Central support departments are reduced or eliminated.
Space is saved.
Fewer and smaller factories may be required.
Materials and tools are brought closer to the point of use.

Use of KANBAN incorporated in the design of a computerized manufacturing
system (Japanese term: ticket; card; market)
Withdrawal Kanban states the quantity that a succeeding process shall withdraw
Production Kanban states the output of the present process
Vendor Kanban that tells the vendor what, how, when, and where to deliver
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Just-in-time (JIT)
appropriate when
Costs of Carrying Inventory
far exceed:
Costs of Ordering and Receiving purchased items

or
Costs of Setting-up Production Runs of internally produced items
Optimum Level of Inventory

Many non-JIT companies, or those who do not fully implement a JIT system, manage
their inventories by trying to maintain an optimum level of inventory.
Optimum Level
is
best inventory level = minimum total costs
too high inventory level = unnecessary carrying costs and risks of obsolescence
too little inventory levels = disrupts production or loses sales
Relevant Costs of Inventories

Cost of Ordering
1. Preparing purchase or production orders
2. Receiving (unloading, unpacking, inspecting)
3. Processing all related documents
4. Extra costs of numerous small production runs, setups and training
5. Quantity discounts lost (trade discounts on volume purchases)
Cost of Carrying
1. Foregone return on capital invested in inventory
2. Risk of obsolescence and deterioration
3. Storage-space costs
4. Personal property taxes on inventory
5. Insurance on inventory
Ordering Costs and Carrying Costs

-tend to offset one another (inverse relationship)
-as orders decrease in frequency and grow in size,
the total relevant costs of carrying the inventory, including interest, increase,
but the total costs of ordering, delivery and so on, decrease;
and vice versa
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Inventory Control
Two Main Questions
1. How much to order?

best/optimum size = Economic Order Quantity (EOQ)
the point where:

total ordering costs = total carrying costs
or
total relevant inventory costs (at the lowest) = ordering costs + carrying costs
2. When to order?
reorder point – inventory level where a purchase order should be placed
Economic Order Quantity
Economic Order Quantity (in units) =

2 xAD xCPO
CCPU
where;
AD = annual demand in units
CPO = cost of placing an order
CCPU = annual cost of carrying one unit in a stock per year
Economic Order Quantity (in peso) =

2 xAD( P) xCPO
CCR
where;
AD (P) = annual demand in peso
CPO = cost of placing an order
CCR = carrying cost ratio
Illustration (9-1): Economic Order Quantity

Annual demand for an inventory item X is 10,500 units, ordering cost is
P15.90 per order placed, and carrying cost per unit per year is 10% of the unit cost
P3.00.
AD = 10,500 units
CPO = P15.90
CCPU = 10% of P3.00 unit cost
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2 (10,500)(15.90)
EOQ = .30
= 1,055 units is the purchased quantity of item X that will
minimize the holding cost and ordering cost
Other Formulas to remember:

Carrying Cost per unit = Total Carrying Costs
(CCPU) Average Inventory
CCPU = Unit Cost x Carrying Cost Ratio
Total Carrying Cost = CCPU x Average Inventory
Average Inventory = Order Size / 2
Technically, however,
Average Inventory = OS/2 + Safety Stock Quantity
Cost per Order = Total Ordering Costs

(CPO) No. of Orders
Total Ordering Cost = Cost per Order x No. of Orders
No. of Orders = Annual Demand (AD)

Order Size
Order Size (OS) = Average Inventory x 2
To immediately apply your new knowledge, proceed to answering ULOa Let’s

Analyze Activity 1 Problems 1 and 2.
Reorder Point (ROP)-inventory level where a purchase order should be placed

ROP = Lead Time Quantity + Safety Stock Quantity
Lead Time-the period (waiting time) between the time the order is placed and the
goods are received can be expressed as Maximum lead time or Normal lead time
Lead Time Quantity = normal usage x normal lead time
Safety Stock
-reserve stock held to avoid stock out in cases of sudden increase in demand and or
delays delivery of orders.
Safety stock = Safety Stock (in usage) + Safety Stock (in time)
Safety stock (in usage)
= (Maximum Usage – Normal Usage) x Normal Lead Time
Safety stock (in time)
= (Maximum Lead Time – Normal Lead time) x Normal Usage
or Average Daily Usage
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Average Daily usage (demand)

= Annual demand / No. of days operation per year
Maximum Inventory Level = Safety Stock Quantity + Order Size
Illustration (9-2): Safety Stock

Company X has the following information relative to its primary raw material:
25,200 cases evenly in one year
Normal lead time= 20 days
Maximum lead time= 25 days
Working days= 360 days
Average daily usage

= 25,200/360 days = 70 units
Safety Stock
= (25 – 20) x 70 = 5(70) = 350 units
To immediately apply your new knowledge, proceed to answering ULOa Let’s

THEORY OF CONSTRAINTS
Goal: to make money now and in the future by managing constraints
-recognizes that the performance of any organization (system) is limited by its
constraints; every system has at least one constraint that limits its output
-develops a specific approach to manage constraints to support the objective of
continuous improvement
-focuses on the system-level effects of continuous improvement.
Each company (i.e., system) is compared to a chain. Every chain has a weakest link
that may limit the performance of the chain as a whole. The weakest link is the
system’s constraint and is the key to improving overall organizational performance.
Why? Ignoring the weakest link and improving any other link costs money and will not
improve system performance. On the other hand, by strengthening the weakest link,
system performance can be improved.
At some point, however, strengthening the weakest link shifts the focus to a different
link that has now become the weakest. This next-weakest link is now the key system
constraint, and it must be strengthened so that overall system performance can be
improved. Thus, TOC can be thought of as a systems approach to continuous
improvement.
Five-Step Method for Improving Performance

The theory of constraints uses five steps to achieve its goal of improving organizational
performance:
1. Identify an organization’s constraints.
2. Exploit the binding constraints.
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3. Subordinate everything else to the decisions made in step 2.

4. Elevate the organization’s binding constraints.
5. Repeat the process as a new constraint emerges to limit output.
Let’s Check
1. In JIT manufacturing, each operation produces
a. only what is necessary for the succeeding operations.
b. all that it can to offset fixed costs.
c. a fixed percentage in excess of orders to ensure adequate quality stock.
d. all that it can in order to build inventories.
2. Companies that adopt just-in-time purchasing system often experience

a. an increase in carrying costs.
b. a reduction in the number of suppliers.
c. a greater need for inspection of goods as they arrive.
d. Less used for linkage with a vendor’s computerized order entry system.
3. The benefits of a just-in-time system for raw materials usually include

a. maximization of the standard delivery quantity, thereby lessening the
paperwork for each delivery.
b. decrease in the number of deliveries required to maintain production.
c. elimination of nonvalue-adding operations.
d. increase in the number of supplier, thereby ensuring competitive bidding.
4. What modern production methodology emphasizes strengthening the weakest link

of the company to improve operations to become more efficient and effective?
a. Weakest link theory
b. Just-in-time
c. Total quality
d. Theory of constraints
5. A manufacturing company is attempting to implement a just-in-time purchase

policy system by negotiating with its primary suppliers to accept long-term
purchase orders which results in more frequent deliveries of smaller quantities of
raw materials. If the JIT purchase policy is successful in reducing the total
inventory costs of the manufacturing company, which of the following
combinations of cost changes would be most likely to occur?
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a. increase purchasing costs; decrease stockout costs

b. increase purchasing costs; decrease quality costs
c. increase quality costs; decrease ordering costs
d. increase stockout costs; decrease carrying costs
Let’s Analyze
Activity 1. Read each problem carefully and provide what is being required.
Problem 1 (adapted)
MTM Corporation has been buying product AAA in lots of 1,250 units which represents
a three month’s supply. The cost per unit is 220. The order cost is P900 per order;
and the annual inventory carrying cost per one unit is P25. Assume that the units will
be reordered evenly throughout the year. Determine the following:
Required:
1. Economic order quantity
2. Number of orders in a year
3. Average inventory based on EOQ
4. Total carrying cost, ordering costs and relevant inventory costs at EOQ
5. Total relevant costs for order sizes of 2,000 units, 1,000 units, 600 units, 250
units and 100 units
Problem 2 (adapted)
The KMT Corporation determines the manufacturing cost per order of a raw material
is P25. The company expects to use P50,000 of this material in the coming year. Its
carrying charge is 10% of inventory. Determine the following:
Required:
1. Economic order quantity in pesos
2. Number of times the raw material be ordered in the coming year
3. Average inventory
4. Total relevant inventory costs at EOQ
Problem 3 (adapted)
FQS Corporation makes available the following information relative to its Material G4.
Annual demand 30,000 units
Working days in a year 300 days
Normal lead time 12 days
Maximum lead time 19 days
Maximum usage per working day 125 units
Economic order size 6,000 units
Required:
1. Lead time quantity
2. Safety stock quantity
3. Reorder point
4. Average inventory
5. Maximum inventory
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In a Nutshell
Activity 1. You are now familiar with the essential terms related to quality and
environmental cost management. But it is important that you are also able to
confidently discuss the concepts introduced. On the space provided below, please
write a thorough discussion of the required information.
1. Discuss just-in-time inventory management.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
2. Define the theory of constraints as used to manage inventory.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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Q&A LIST
1.
2.
3.
4.
5.
KEYWORDS INDEX
Carrying costs Kanban system Reorder point
Economic order quantity Lead time Safety stock
Just-in-time inventory mgmt. Ordering costs Theory of constraint
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Lean Accounting and Productivity Measurement
Big Picture in Focus: ULOc. Describe the basics of lean accounting and
productivity measurement.
Metalanguage
In this section and in order to demonstrate ULOc, the most essential terms
relevant to the study of activity-based costing will be operationally defined. You will
encounter these terms as we expound the topic into the study of activity-based
management system. Please refer to these definitions in case you will encounter
difficulty in understanding related terms and concepts.
1. Lean manufacturing. It is an operating approach designed to eliminate waste and

maximize customer value. It is characterized by delivering the right product, in the
right quantity, with the right quality (zero-defect), at the exact time the customer
needs it and at the lowest possible cost.
2. Lean accounting. This accounting approach organizes costs according to the
value chain and collects both financial and nonfinancial information. The objective
is to provide financial statements that better reflect overall performance, using both
financial and nonfinancial information.
Essential Knowledge
Lean Manufacturing
Many companies are changing their business processes to focus on the customer as
well as on the value chain activities that support a customer orientation and focus on
the elimination of waste. These companies have embarked on lean manufacturing,
which aims at shedding waste and excess from operations. Companies that make this
change in focus find that their accounting must also change. This accounting
approach, referred to as lean accounting.
Objectives:
-allows managers to 1) eliminate waste, 2) reduce costs, and, 3) become more efficient
-adds value by reducing waste
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Firms implementing lean manufacturing systems:

-pursuing a cost reduction (cost leadership) strategy by redefining the activities
performed within an organization
Advantages: better quality, increased productivity, reduced lead times, major

reductions in inventories, reduced setup times, lower manufacturing costs, and
increased production rates
Just-in-time (JIT) manufacturing shares many methods of the lean manufacturing

approach.
Becoming lean requires lean thinking that has the following principles:
1. Precisely specify value by each particular product.
2. Identify the “value stream.”
3. Make value flow without interruption.
4. Let the customer pull value from the producer.
5. Pursue perfection.
Lean Accounting
While the accounting practice cannot outpace changes in the operation of businesses,
it should closely follow. The numerous changes in structural and procedural activities
that we have described for a lean firm have changed traditional cost management
practices for many companies.
The traditional cost management system may not work well in the lean environment.
In fact, the traditional costing and operational control approaches may actually work
against lean manufacturing.
Standard costing variances and departmental budgetary variances will likely

encourage overproduction and work against the demand-pull system needed in lean
manufacturing.
For example, emphasis on labor efficiency by comparing actual hours used with hours
allowed for production encourages production to keep labor occupied and productive.
Similarly, emphasis on departmental efficiency (e.g., machine utilization rates) will
cause non-bottleneck departments to overproduce and build work-in-process
inventory.
Furthermore, we already know from our study of activity-based costing that in a

multiple-product plant, the use of a plantwide overhead rate can produce distorted
product costs relative to focused manufacturing assignments or activity-based
assignments. Distorted product costs can signal failure for lean manufacturing even
when significant improvements may be occurring.
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To avoid obstacles and false signals, changes in both product-costing and operational
control approaches are needed when moving to a value-stream-based lean
manufacturing system.
Let’s Analyze
Activity 1. You are now familiar with the essential terms related to lean accounting.
But it is important that you are also able to confidently discuss the concepts
introduced. On the space provided below, please write a thorough discussion of the
required information.
1. Discuss briefly the five principles of lean thinking embodied in lean manufacturing.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
2. Describe lean accounting.
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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In a Nutshell
Activity 1. Based on the definition of the most essential terms in the study of the lean
manufacturing and accounting and the learning exercises that you have done so far,
please feel free to write your arguments or lessons learned below in relation to this
topic.
1. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
2. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
3. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
4. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
5. _____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
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Q&A LIST
1.
2.
3.
4.
5.
KEYWORDS INDEX
Lean accounting Lean manufacturing Lean thinking
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Course Schedule

Weeks 8-9 ULO C Let’s Analyze Activity
Weeks 8-9 ULO C In a Nutshell Activity
Weeks 8-9 ULO C Q&A List
Competency Assessment
Final Exam
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ONLINE CODE OF CONDUCT

1. Students are expected to abide by and honor a code of conduct, and thus, everyone
and all are exhorted to exercise self-management and self-regulation.
2. All students are guided by professional conduct as learners in attending On-Line
Blended Delivery (OBD) course. Any breach and violation shall be dealt with properly
under existing guidelines, specifically in Section 7 (Student Discipline) in the Student
Handbook.
3. Professional conduct refers to the embodiment and exercise of the university Core
values, specifically in the adherence to intellectual honesty and integrity; academic
excellence by giving due diligence in virtual class participation in all lectures and
activities, as well as fidelity in doing and submitting performance tasks and
assignments; personal discipline in complying with all deadlines; and observance of
data privacy.
4. Plagiarism is a serious intellectual crime and shall be dealt with accordingly. The
University shall institute monitoring mechanisms online to detect and penalize
plagiarism.
5. Students shall independently and honestly take examinations and do assignments,
unless collaboration is clearly required or permitted. Students shall not resort to
dishonesty to improve the result of their assessments (eg. Examinations,
assignments).
6. Students shall not allow anyone else to access their personal LMS account. Students
shall not post or share their answers, assignment or examinations to others to further
academic fraudulence online.
7. By enrolling in OBD course, students agree and abide by all the provisions of the
Online Code of Conduct, as well as all the requirements and protocols in handling
online courses.
Course Prepared by:
MYRA T. MIRAFLORES, CPA

Author
Course reviewed by:
DEVZON U. PORRAS JADE D. SOLAÑA

PH-BSAIS/BSIA PH-BSA/BSMA
MARY GRACE S. SOMBILON

AD
Approved by:
LORD EDDIE I. AGUILAR

Dean
140

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UNIVERSITY OF MINDANAO

College of Accounting Education

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for Self-Directed Learning (SDL)

Course/Subject: ACC 213 – STRATEGIC COST MANAGEMENT

Name of Teacher: _____________________________

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

Big Picture Week 1-3: Unit Learning Outcomes 1

Big Picture Week 4-5: Unit Learning Outcomes 66

Big Picture Weeks 6-7: Unit Learning Outcomes 90

Big Picture Weeks 8-9: Unit Learning Outcomes 115

Online Code of Conduct 140

Course Outline: ACC 213 – STRATEGIC COST MANAGEMENT

Course Coordinator: Myra T. Miraflores

Course Outline Policy

Areas of Concern Details

If the assessment task is done in real time through the features in

Since this course is included in the CPALE, you will be required to

This is non-negotiable for all licensure-based programs.

Please note that academic dishonesty such as cheating and

However, if the late submission of assessment paper has a valid

For group assessment tasks, the course coordinator will require

Re-marking of You should request in writing addressed to the program coordinator

If disapproved by the course coordinator, you can elevate your case

All culled from on-campus/onsite sessions (TBA):

Submission of the final grades shall follow the usual University

Preferred Referencing Harvard Referencing Style

Contact Details of the Lord Eddie I. Aguilar

Contact Details of the Mary Grace S. Sombilon

Jade Solana CPA, MBA

Library Contact Brigida E. Bacani

for inquiries, you can email at umlic.eresources@gmail.com,

Well-being Welfare Ronadora E. Deala

GSTC Facebook Page:

Course Information – see/download course syllabus in the Black Board LMS

CO The course ACC 213 is designed to deepen your knowledge on cost

a. Explain the nature and characteristics of cost management.

Introduction to Cost Management (a)

Big Picture in Focus: ULOa. Explain the nature and characteristics

1. System. It is a set of interrelated parts that performs one or more processes to

Accounting Information System

A system is a set of interconnected parts composed of one or more processes to

Figure 1. The Accounting Information System

The interrelated processes include collecting, recording, summarizing, and

Cost Management System vs. Financial Accounting System

Criteria Cost Management Financial Accounting

Target users of output Internal information users External information users

Types of information Financial (cost Financial information

Uses of information 1. Costing of products, 1. Investment decisions

Cost Management Systems

Cost Management Subsystems

A cost management system consists of two major subsystems: the cost

1. The cost accounting system is a cost management subsystem designed to

2. The operational control system is a cost management subsystem designed to

Factors Affecting Cost Management

1. Global Competition. Improvement in transportation and communication systems

2. Growth of the Service Industry. Many services such as accounting,

3. Advances in Information Technology.

b. An enterprise resource planning (ERP) system is a centralized database

c. Availability of personal computers (PCs), online analytic programs

d. Emergence of electronic commerce. Electronic commerce (e-commerce)

4. Advances in the Manufacturing Environment.