MAS

MANAGEMENT ACCOUNTING: INTRODUCTION

Management is a coordinating function that combines limited human and material resources in
the production of goods and services to meet objectives of the organization. (Cabrera, 2017)
This coordinating function involves planning, controlling and decision making.

Distinction between Management Accounting, Financial Accounting and Cost Accounting.

Management Accounting – involves collection, analysis, preparation and communication of

information for management decision making and tool for achieving organizational objectives.

Financial Accounting – recording, preparation and presentation of recognizable business

transactions following generally accepted accounting principles for both internal and external
use.

Cost Accounting – a system of assigning cost to cost subjects. This is vital for both Financial and
Management Accounting.

Cost accounting in Financial Accounting:

Cost should include all: [PAS 2]

 costs of purchase (including taxes, transport, and handling) net of trade discounts
received
 costs of conversion (including fixed and variable manufacturing overheads) and
 other costs incurred in bringing the inventories to their present location and condition

Cost Accounting in Management Accounting

 a complex analysis of different type of costs including fixed and variable manufacturing
overhead mentioned in PAS 2.

Includes :
 Cost-Volume-Profit Analysis
 Standard Costing and Variance Analysis
 Variable Costing and Absorption Costing
 Financial Planning & Budgets
 Activity Based Costing (ABC) and Activity Based Management (ABM)
 Strategic Cost Management

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Management Accounting in Organizational Functions: Controller and Treasurer

Controllership is the practice of the established science of control which is the process by which
management assures itself that the resources are procured and utilized according to plans in
order to achieve the company’s objectives. (Cabrera, 2017)

Treasurership is concerned with the acquisition, financing and management of assets of a

business concern to maximize the wealth of the firms for its owners. (Cabrera, 2017)

In other words, controllership involves recording, audit, and reporting of business transactions
while treasurership focuses on managing company assets in order to maximize funds while
assuring liquidity and solvency.

Controllership Treasurership
1. Planning for control 1. Provision of Capital
2. Financial reporting and interpretation 2. Short-term financing
3. Management Audit 3. Investor Relations
4. Internal Audit 4. Banking and custody of funds
5. Tax and administration 5. Credit and Collections
6. Government reporting 6. Investments
7. Economic Appraisal 7. Insurance

Management Accounting will be under Controllership. While Financial Management will be

under Treasurership. These topics are the ones that will be discussed in Management
Advisory Services.

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MANAGEMENT ACCOUNTING: COSTS

COSTS

Cost is the cash or cash equivalent value sacrifice for goods and services that are expected to
bring current or future benefit to the organization. (Cabrera 2017)

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COST-VOLUME-PROFIT ANALYSIS

Cost behavior refers to how a cost will react or respond to changes in the level of business
activity.

Types of Cost according to cost behavior

Variable cost: one that remains constant on per unit basis but which changes in total in direct
relationship to changes in volume.

Fixed cost: one that remains constant in total amount but which changes if expressed on a per
unit basis inversely with changes in volume.

Mixed cost: a cost that contains both variable and fixed cost elements

RELEVANT RANGE
- the range within which the assumptions relative to variable and fixed cost
behavior are valid.

Using the concept on cost behavior costs, the management may use the CVP Analysis in making
decisions such as 1) products to manufacture or sell, 2) pricing policy to follow, 3) marketing
strategy to employ and 4) type of productive facilities to acquire.

COST-VOLUME-PROFIT (CVP) analysis

shows the interrelationship between cost, volume and profit analyzing the effects
between the following five elements: price, volume or level of activity, per unit variable cost,
total fixed cost and mix of products sold.

CVP ANALYSIS RATIOS

1. Contribution margin per unit – excess of unit selling price over variable costs and the
amounts each unit contributes towards covering fixed costs and providing operating
profits.

CM per unit = Unit SP – Unit variable costs

2. Contribution margin ratio – percentage of CM to sales

CM Ratio = CM / Sales

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Table I. Income Statement: Standard vs. Contribution Approach

Standard Contribution Approach

Sales PXX Sales PXX
Less: Cost of Sales XX Less: Variable cost XX
Gross Profit XX Contribution Margin XX
Less: Operating Expenses XX Less: Fixed Costs XX
Net Income XX Operating Income XX

3. Break-even point (in units) = Total Fixed Costs / CM per unit

4. Break-even point (in pesos) = Total Fixed Costs / (1- (Variable Costs/Sales))
5. Break even sales for multi-products firm (combined units)
= Total Fixed Costs / Weighted Average CM per unit ***

*** Weighted Average CM per unit = Unit CM X no. of units per Mix + (Unit CM X no. of units per Mix
Total number of units per Sales Mix
6. Break even sales for multi-products firm (combined pesos)
= Total Fixed Costs / Weighted CM ratio ***

***Weighted CM Ratio = Total Weighted CM (P) / Total Weighted Sales (P)\

7. Target sales volume to earn a desired amount of profit

Sales (units) = Total Fixed Costs + Desired Profit

CM per unit

Sales (P) = Total Fixed Costs + Desired Profit

CM ratio
8. Margin of safety (MS) = Actual or Budgeted Sales – Break even Sales
Indicates the amount by which sales could decrease before losses are incurred
9. Margin of Safety Ratio = Margin of safety (P) / Actual or Budgeted Sales

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MAS ACTIVITY 1

1. Cost Profit Volume Analysis is important in determining the

a. Relation between revenues and costs at various levels of operation.
b. Volume of operation necessary to break-even
c. Variable revenues needed to equal fix assets
d. Sales revenue needed to equal variable cost

2. The contribution margin ratio always increases when the:

a. Break-even point increases.
b. Break-even point decreases.
c. Variable expenses as a percentage of net sales decrease.
d. Variable expenses as a percentage of net sales increase.

3. The total cost per unit of Product A at a production volume of 2,500 units a month is P18.75
as follows:
Variable cost per unit P 12.50
Allocated fixed manufacturing overhead 2.50
Allocated fixed selling and administrative cost 3.75
TOTAL P 18.75

If the product is selling at P22.50 a unit, the marginal contribution of product A at present volume
of sales is
A. P25,000 B. P37,500 C. P18,750 D. none of these

4. The most likely strategy to reduce the break-even point would be to

a. Increase both fixed costs and the contribution margin.
b. Decrease both fixed costs and the contribution margin.
c. Decrease the fixed cost and increase the contribution margin.
d. Increase the fixed cost and decrease the contribution margin.

5. Given the selling price of P120 per unit; contribution margin ration at 25% and fixed costs of
P250,000, the total variable expenses at the break-even point would be:
a. P350,000 b. P750,000 c. P450,000 d.P250,000

6. Which of the following statements is true with regard to the profit-volume chart, where profit
represent the vertical axis and sales volume represents the horizontal axis?
a. The slope of the profit line is affected by the product’s total fixed costs
b. The slope of the profit line is not affected by the product selling price.
c. The slope of the profit lines remains uncharged as the variable cost per unit decreases,
assuming the selling price and total fixed costs is remain unaffected.
d. The slope of the profit line is the product’s contribution margin per unit.

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7. Operating income is shown on a cost-volume-profit chart where the:

a. Total cost line exceeds the total sales revenue line
b. Total sales revenue line exceeds the total fixed cost line
c. Total sales revenue lines exceeds the total cost line.
d. Total cost line intersects the total sales revenue line

8. Janet sells a product for P6.25. The variable costs are P3.75. Janet’s break-even units are
35,000. What is the amount of fixed costs?
a. P 87,500 b. P 35,000 c. P 131,250 d. P104,750

9. The current sales price is P25 per unit and the current variable cost is P17 per unit. Fixed costs
are P 40,000. If the sales price is increase by P2, and all the other costs remain unchanged, the
break-even points in units will:
a. Increase by 1,000 units c. decrease by 1,000 units
b. Decrease by 2,000 units d. decrease by 119 units

10. During 2016, Thor lab supplies hospitals with comprehensive diagnostic kit P120. At the
volume of 80,000 kits, Thor has fixed costs of P1,000,000 and a profit before income taxes of
P200,000. Due to an adverse legal decision, Thor”s 2017 liability insurance increased by
P1,200,000 over 2016. Assuming the volume and other cost are unchanged, What should the
2017 price be if Thor is to make the same P200,000 profit before income taxes?
a. P120.00 b. P135.00 c. P150.00 d. P240.00

11. VT Inc. Sales telephones for P50 per unit. Variable cost are P20.00 per unit and fixed costs are
P590,000. How many units of products must be sold to realize a profit of 20% of sales (rounded
up to the nearest 10 units)?
a. 19,970 b. 14,750 c. 59,000 d. 29,500

12. Reed sells widgets for P100 each. The variable cost for each widgets is P65, reed’s annual
fixed cost are P125,000 and the tax rate is 30%. How many widgets does reed need to sell to
generate a net income of P140,000 (rounded up to the nearest ten)?
a. 9,290 b. 8,780 c. 3,250 d. 5,000

13. Ipil-Ipil Corp. Would like to market a new product at a selling price of P15 per unit. Fixed cost
for this product are P1,000,000 for less than 500,000 units of output and P1,500,000 for 500,000
or more units of output. The contribution margin percentage is 20%. How many units of this
product must be sold to earn a target operating income of P1,000,000?
a. P754,900 b. P833,334 c. P 825,530 d. P785,320

14. Mann Corp. has a contribution margin ratio .26. It aims to have a net income of P320,000
with a sales volume of P2,000,000. Its total fixed costs amount to:
a. P200,000 b. P83,200 c. P 230,777 d, P520,000

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Items 15 and 16 are based on the following information: The selected bugeted data of JZ
Company for the coming year:
Selling Price P 12
Budgeted Sales P 600,000
Fixed Expenses P 150,000
Variable cost per unit P8

15. What is the break-even sales in units?

a. 35,000 b.37,500 c. 40,000 d. None of these

16.What is the margin of Safety in percentage?

a. 15% b. 20% c. 25% d. None of these

17. If a firm's margin of safety is 35% on sales of P200,000, then its margin of safety on sales of
P300,000 will be (assume fixed costs, the variable cost per unit, and the sales price per unit do
not change):
a. P105,000 b. P170,000 c. P 100,000 d. P35,000

18. Let: BES = break-even sales,R = revenue per unit,F = fixed costs, V = variable cost per unit,
CMR = contribution ratio,
CM = contribution margin per unit, S x R = sales pesos, S = sales in units
(SXR) - (F / CMR) is the:
a. break-even point in units c. break-even point in pesos
b. margin of safety d. sales mix composite

19. Sales in East Company declined from P100,000 per year to P80,000 per year, while net
operating income declined by 300 percent. Given these data, the company must have had an
operating leverage of:
a. 15 b. 2.7 c. 30 d. 12

20. Thomas Company sells products X, Y, and Z. Thomas sells three units of X for each unit of Z,
and two units of Y for each unit of X. The contribution 1.10 margins are P1.00 per unit of X, P1.50
per unit of Y, and P3.00 per unit of Z. Fixed costs are: P600,000. How many units of X would
Thomas sell at the break-even point
a. 40,000 b. 120,000 c. 360,000 d. 400,000

21.Newfoundland Company sells products X and Y; 40 percent of the company's total revenue is
from X. The contribution margin ratios are 3 percent for X and 60 percent for Y. Fixed costs are
P200,000. What would be the total sales required for Newfoundland to earn a target profit of
P40,000 before tax?

a.P200,000 b. P300,000 c. P416,667 d. P500,000

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22. Ace Manufacturing plans to produce two products, Product C and Product F, during the next
year, with the following characteristics.
Product C Product F
Selling price per unit P10 P15
Variable cost per unit P8 P10
Expected sales (units) 20,000 5,000

Total projected fixed costs for the company are P30,000. Assume that the product mix would be
the same at the break-even point as at the expected level of sales of both products. What is the
projected number of units (rounded) of Product C to be sold at the break-even point?
a. 2,308 units b. 9,231 units c. 11,538 units d. 15,000 unit

23. Sari-sari Corporation is a multiple-product firm. In their review of operations, the decided to
shift the sales mix from less profitable products to more profitable products, accounting for 30%
of gross sales. This will cause the company's break-even point to:
a. Decrease c. Change by 15%
b. Increase d. Not Change

24. DIY Manufacturing Company produces two types of power lawn mowers, the basic and the
self-propelled. Its master budget (based on expected sales) for the second quarter is as follows:
Basic Self-Propelled Total
Sales (units) 30,000 60,000 90,000
Sales P 6,000,000 P 18,000,000 P 24,000,000
Variable expenses 2,400,000 8,100,000 10,500,000
Contribution margin P 3,600,000 P9,900,000 P 13,500,000
Fixed operating expenses 7,200,000
Operating Income P 6,300,000

DIY's income tax rate is 40%. Given the sales mix and expected sales of the basic mower and self-
propelled mower in the master budget, what is DIY's margin of safety ratio for the second quarter
(rounded to three decimal places)?
a.0.467 b. 0.875 c. 0.481 d. 0.929

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