UNIVERSITY OF BOHOL

PROFESSIONAL STUDIES

SYNTHESIS PAPER FOR BUSINESS POLICY

JUNE 4, 2015

Report Submitted To:

DR. AMMON DENIS R. TIROL, DM, CPA
As Partial Fulfillment of the Requirements in
BA200: Managerial Accounting

Submitted by:
FRANCIS PAUL J. BUTAL
MSBA

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TABLE OF CONTENTS:

The Importance of Managerial Accounting 3

Cost Management System 4
Strategic Cost Management and Value Chain 5
Process Management 5
Manufacturing Costs 5
Fixed and Variable Costs 5
Process Costing and Job Order Costing 6
Cost Hierarchy 6
Cost Drivers 6
Just-in-Time 7
Cost Behavior, Cost Estimation, Cost Prediction, and Cost Analysis 7
Account Classification Method 8
Cost-Volume-Profit Analysis 8
Operating Leverage 8
Absorption Costing 9
Flexible Budget and Static Budget 9
Cost Centers 9
Performance Reports 9
Activity-Based Responsibility Accounting 10
Decision-making Process 10
Alternatives 10
Investment Center 10
Return on Investment 11
Absorption Costing 11
Pricing Strategies 11
Conclusion 12
References 13

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 Accounting sheets, forms and numbers are very much useful in making
sound and viable decisions for the success of a business enterprise. This
statement very much sums up my important realization this summer. Business is
not all about trying new things and hoping it will work. It is not about have to work
hard day and night to make sure revenues are pouring. There are a lot of benefits
we can derive from math and accounting in order for us to ensure the success of a
business enterprise. There is a need to connect the dots and cross the T’s. It is
important to realize that profitability and sustainability of the business can well be
achieved in leaps and strides if we apply mathematical formulas and accounting
principles in order for us to plan carefully our moves and come up with the right
decisions to make sure that our business endeavor is a success. After all, as they
always say, “Numbers don’t lie.”
Managerial accounting provides the mathematical and accounting principles
needed a business organization to succeed. Managerial accounting information is
used for decision making, planning, directing, and controlling an organization’s
operations, and assessing its competitive position. Managerial accounting reports
are intended for managers within the organization and are not subjected to any
regulation. These reports often focus on departments and are based on historical
data, estimates and future projections. The purpose of these reports is to provide
the decision-maker with hard facts and data so that he may arrive at the right
decisions concerning the whole operations of the business.
Managerial accounting is driven by the need for information. It is intended to
assist in decision-making, as has been reiterated several times, but often it is also
intended to influence and manager’s decision. Reactions to managerial accounting
information can have a large impact on an organization. A managerial
accountant’s understanding of human behavior can help him to be more effective
in providing information.
More often, managerial accountants add value to the organization by
providing information, assisting in directing and controlling activities, motivating

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managers and employees towards the organization’s goals, measuring
performance, and assessing the organization’s competitive position.
There are costs and benefits to providing managerial accounting
information. The costs include compensation of personnel, purchase and
operations of computers, and the time spent by users reading and understanding
the information. Benefits include improved decisions, more effective planning,
improved efficiency, and better control of operations.
In effect, this class has taught the undeniable and irrevocable value of
numbers. All these principles will definitely help me in making the right decisions
for the company that I will be creating, leading, managing or just be a part of. This
class has introduced me to the world of costs and pricing as the central topics in
managerial accounting, as to their importance on how critical these variables are
in influencing business decisions, so as to become highly profitable. As mentioned
in class, companies should seek to maximize profits.
In light of the aforementioned, let me enumerate the important points and
viable lessons that have the most impact on me, as a budding entrepreneur:
Costs are very much important to consider in assessing the profitability of a
business. A cost is the measure of resources given up to achieve a particular
purpose. If costs are too high, and prices of the products of competitors are lower
than your costs, then there is no reason for you to continue the business. Hence,
in order to determine this, there is a need for a cost management system. A cost
management system is a planning and control system with four objectives,
namely: measure the cost of resources consumed in the organization’s significant
activities, identify and eliminate non-value added costs since these are costs of
activities that can be eliminated without deteriorating quality, performance or
value, determine the efficiency and effective of all major activities, and identify and
evaluate new activities that can improve further performance. The most important
thing is with a cost management system, you are able to pinpoint the area that is
stacking up your costs, address such area and find ways to lower the cost.

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 Another important point is having a strategic cost management within the
value chain. The set of linked, value-creating activities, ranging from securing
basic raw materials and energy to the ultimate delivery of products and services, is
called the value chain. Managers should carefully examine the chain of linked
activities in order to identify any constraints that prevent the organization from
reaching a higher level of achievement. In this regard, managerial accountants are
providers of information and are often in touch with the heartbeat of the
organization. They frequently interact with sales personnel, finance specialists,
production people and managers at all levels. In short, there is a constant need for
communication and research in order for them to exactly pinpoint the area where
costs can be reduced further.
Another point to consider in cost reduction, so as to maximize profits, is
process management. Managers need cost information to perform the functions of
strategy formulation, planning, control, decision making and directing. For
instance, Nike and Adidas, in order to reduce manufacturing costs, have
established factories in China, Bangladesh and Thailand, since labor costs in
these countries are significantly lower compared to the costs of labor in America.
Hence, the process of creating the products is transferred elsewhere, but the head
office is still in the United States.
Therefore, manufacturing costs are significantly reduced in this instance.
Manufacturing costs include direct material, direct labor and manufacturing
overhead. Direct material are costs of raw materials that are used to make, and
can be conveniently traced, to the finished product. Direct labor refers to cost of
salaries, wages and fringe benefits for personnel who work directly on
manufactured products. Manufacturing overhead comprises other manufacturing
costs which are not included in the direct material and direct labor.
Other costs to consider are fixed costs and variable costs. Always
remember that total variable costs change when activity changes, but the variable
cost per unit remains the same. On the other hand, total fixed costs remain

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unchanged when activity changes. Hence, it is important to maximize fixed costs
by producing more, through creating demand, thereby increasing it.
Furthermore, another cost concepts to consider are process-costing and
job-order costing. Process costing is used in repetitive production environments,
where large numbers of identical or very similar products are manufactured in
continuous flow. Here, costs are accumulated by department, rather than by job
order or batch. A good example of this is the manufacture and bottling of Coke.
Job-order costing is used when relatively small numbers of products are produced
in distinct batches or job orders and these products differ significantly from each
other. Here, costs are accumulated by job-order and recorded on job-cost records.
Currently, we are establishing a business of manufacturing electric-powered
vehicles. And since, there is little demand for our product, we are applying the
concept of job-order costing. So far, our costing depend heavily on a per-unit
basis. This costing also affect the price of our product, but more on this later when
we reach the topic of pricing.
It was also mentioned that there are four broad categories of activity cost
pools. These are unit level, batch level, product sustaining level and facility level.
The bigger your business becomes, then the chances of the movement from unit
level to facility level also increases. If the business is still in its early stages, and
with low capitalization, it is highly likely that your business will fall in the unit level
category. High capital investment therefore characterizes facility level. Hence, the
decision to invest heavily on machinery will greatly depend on the kind of market
you have. This classification of activities into unit level, batch level, product-
sustainability level and facility level is called a cost hierarchy.
Also, we need to acquaint ourselves with the concept of cost drivers. A cost
driver is a characteristic of an event or activity that results in the incurrence of
costs. In activity-based costing systems, the most significant cost drivers are
identified. Then a database is created which shows how these cost drivers are
distributed across products. Hence, because of such database, these information

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systems have the potential not only to facilitate decisions but also to influence the
behavior of decision makers.
We also need to familiarize ourselves with the concept of just-in-time (JIT)
inventory system. JIT management system is a comprehensive inventory and
manufacturing control system in which no materials are purchased and no
products are manufactured until they are needed. An important goal of a JIT
system is to establish a smooth production flow, beginning with the arrival of
materials from suppliers and ending with the delivery of goods to customers. JIT
helps a lot in minimizing, or even eliminating, warehousing costs. Hence, costs are
reduced if the JIT system is applied to its perfection. Careful planning is needed to
make this happen.
Having known the aforementioned concepts helps us recognize the role of
costs in maximizing profitability. In order to plan operations and prepare the proper
budget, managers need to predict the costs that will be incurred at different levels
of production and sales. Hence, the importance of knowing the following concepts.
Cost behavior refers to the relationship between cost and activity. Cost
estimation is the process of determining how a particular cost behaves, often
relying on historical cost data. Cost prediction means using our knowledge of cost
behavior to forecast the cost to be incurred at a particular level of activity. Finally,
cost analysis helps management plan for the costs to be incurred at various levels
of sales activity. In order for us to properly do cost prediction and cost analysis,
which are the penultimate results and effects of cost behavior, there is a need to
determine properly the variable costs and fixed costs in the production of the
products. As mentioned earlier, total variable costs change when activity changes,
but the variable cost per unit remains the same. On the other hand, total fixed
costs remain unchanged when activity changes. Hence, it is important to maximize
fixed costs by producing more, through creating demand, thereby increasing it.
In using cost behavior patterns to help in the budgeting process, first, a
sales forecast should be made. The sales forecast will help determine in
maximizing fixed costs, since this is constant no matter the number of products are

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being manufactured. Examples of fixed costs include property taxes and
depreciation costs of buildings and equipments. Hence, marketing must be given
further focus so as to increase the demand for your product, thereby maximizing
fixed costs.
Among the different methods of cost estimation, I prefer the account-
classification method since it is the least complicated. In this method, the cost
analyst classifies each cost item in the ledger as a variable, fixed or semivariable
cost. The classification is based on the analyst’s knowledge of the organization’s
activities and experience with the organization’s costs. Once the costs have been
classified, the cost analyst estimates cost amounts by examining job-cost records,
paid bills, labor time cards, and other source documents.
The cost-volume-profit (CVP) technique helps in determining the break-
even point in the business. Here, the price that will result in total costs equaling
total revenues is determined. In short, CVP analysis provides management with a
comprehensive overview of the effects on revenue and costs of all kinds of short-
run financial changes. As the first step, we will need to find the break-even point.
Upon determining the break-even point and the sales forecasts fall short of this
point, then there is no reason to continue with the business, unless a scheme may
be devised to lower costs, so as to go beyond the break-even point, given the
amount of sales revenue being forecasted.
The extent to which an organization uses fixed costs in its cost structure is
called operating leverage. Operating leverages results when you are able to
maximize fixed costs. The greater the proportion of fixed costs in a firm’s cost
structure, the greater the impact on profit will be from a given percentage change
in sales revenue. The operating leverage is greatest in firms with a large
proportion of fixed costs, low proportion of variable costs, and the resulting high
contribution-margin ratio. A firm’s operating leverage also affects its break-even
point. Since a firm with relatively high operating leverage has proportionately high
fixed expenses, the firm’s break-even point will be relatively high.

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 Furthermore, I prefer absorption costing over variable costing, since under
this costing, all manufacturing costs, including fixed manufacturing overhead, are
assigned as products costs and stored in inventory until the products are sold.
Thus, all costs are taken into account in pricing the product.
I prefer flexible budget over a static budget. Flexible budget is not based
solely on only one level of activity, instead it covers a range of activities within
which the firm may operate. It provides more room for adjustment as compared to
a static budget. A flexible overhead budget is defined as a detailed plan for
controlling overhead costs that is valid in the firm’s relevant range of activity. On
the other hand, a static budget is so rigid since it is solely based on one particular
activity.
Moreover, there is also a need to consider cost centers in making business
decisions. A cost center is an organizational subunit, such as a department or
division, whose manager is held accountable for the costs incurred in the subunit.
When I was with HSBC, there are times when staff are asked to do overtime even
in a department where they do not belong to when the need arises. For example, a
customer service representative (CSR) may be asked to help in the credit risk
management (CRM) department in approving and denying credit card
applications. When the overtime is filed, the cost center is specified based as to
where the overtime was made, and not as to which department the employee
belongs. In this case, the CSR’s overtime salary is charged to the cost center of
CRM, and not to the call center.
Also, performance reports need to be considered. A performance report
shows the budgeted and actual amounts, and the variances between these
amounts, of key financial results appropriate for the type of responsibility center
involved. With these reports, the manager can evaluate his subordinates, as well
as his, performance. This will help the general manager in improving the
organization’s performance, motivating employees and planning future operations.
There also has been a shift to focusing more on activities instead on
financial performance measures. Hence, nowadays, activity-based responsibility

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accounting has become more popular, since decision makers need to know which
activity costly and counter-productive.
Another major contribution of managerial accounting in providing relevant
information in the decision-making process is the provision of the six-step process.
The steps are as follows: first, clarify the decision process; second, specify the
criterion upon which the decision will be made; third, identify the alternatives;
fourth, develop a decision model that brings together the criterion, constraints and
alternatives; fifth, collect the data; and lastly, select an alternative. A skilled
manager relies on experience to evaluate qualitative factors that do not fit easily
into numerical decision models. Information that is useful in decision-making must
be relevant, accurate and timely.
The importance of alternatives is crucial since relevant information involves
costs and benefits that differ among the alternatives being considered and are
future-oriented, wherein both guidelines must be met. For instance, a pizza parlor
may decide between two alternatives, either purchase the box from Manila, which
is 75 centavos more expensive, but thicker and more durable, as compared to
ordering the boxes from Cebu, which are thinner. If the cheaper boxes are chosen,
the opportunity lost is the better quality of the boxes which the consumers may
appreciate more, and thus the packaging of the products will be perceived by
consumers as better and classier. If the more expensive boxes are selected, then
the opportunity lost is the 75 centavo savings that the business may benefit from.
Each alternative has its own pros and cons.
There is also the element of uncertainty. Analysts can incorporate
uncertainty into the decision process by weighing an alternative with its probability
of occurrence. Multiplying the alternative by a probability and then summing the
results will yield the expected value, an average that is used to make the decision.
An investment center is also another important point to consider. It is an
autonomous business unit or division whose manager has control over fixing
prices and incurring costs besides having control over the use of investment funds.
Its performance is measure against its use of capital. For me, the best measure of

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an investment center is the Return on Investment (ROI). ROI can be increased by
any of the following actions: increasing sales, reducing expenses, or decreasing
the deployed assets. But the best way to achieve a high rate of ROI is to focus on
increasing sales while controlling costs and being mindful of the amount invested
in productive assets.
At the start, I have already been blabbering about pricing. Costs have a
great effect on the price of the products. The higher the costs, then the prices also
tend to be high. Among the pricing methods that I have learned in class, I am
amenable to applying the absorption cost pricing formula. Absorption costing
means that all of the manufacturing costs are absorbed by the units produced.
Advantages include price covers all costs, perceived as equitable, and comparison
to competitors is considered. The only downside is the fixed and variable costs are
not segregated, hence activity-based accounting is not followed.
In the manufacturing of electric-powered vehicles, the absorption costing is
more applicable as compared to variable costing. All the costs that we have
incurred were all taken into account when we priced the vehicle. Every single
centavo is being accounted for as costs, and is considered in pricing our product.
We feel that this is only way we can get back all that we have invested, and every
costs even if it is not directly applied to the product is accounted for. This is the
best way to do pricing since we are also applying job-order costing. We don’t
manufacture our products in large volumes.
Pricing strategies also depend on the product being sold. There are two
types of pricing strategies, skimming and penetration. In skimming, the initial price
is high with intent to gradually lower the price to appeal to a broader market.
Profits are being maximized by taking advantage of the higher price at first, then
only lowering it when the demand for such product has also waned down. This
strategy is usually applied by gadget-manufacturers. Cellphone, tablets and
cameras are priced really high upon its release in the market, since the demand
for such products is also high, as a result of heavy marketing campaigns. These

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manufacturers maximize the profits they can reap off from selling their products at
the highest possible price.
Adversely, in penetration, initial price is set at the lowest possible price with
intent to quickly gain market share. This strategy was effectively applied Angel’s
Burgers. They sold their products initially at ridiculously low prices, and in a buy-
one-take-one fashion. Hence, they were able to immediately capture a huge chunk
of the market share. Mang Inasal also applied penetration by being one the first
fast-food restaurants to offer “unlimited rice” to its patrons. Such a strategy has
generated billions for the business. In fact, Jollibee bought Mang Inasal from its
founder, Mr. Sia, for three billion pesos (P3,000,000).
In summary, I have learned so much from this subject, specifically in
making sound and viable quantitative, and even qualitative, decisions. The timing
of this subject is so significant since I am starting a manufacturing business.
The choice of a particular accounting principle, strategy or method still
depends on the kind of business you are undertaking. A strategy may be
applicable to a restaurant, but not to a manufacturing firm. The important things is
you are able to garner the wisdom to decide which accounting principle, strategy
or method is best applicable.

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REFERENCES:

Hilton, Ronald, “MANAGERIAL ACCOUNTING Ninth Edition,” McGraw-Hill Publishing,

New York, c 2011.

Caplan, Dennis, “MANAGEMENT ACCOUNTING: CONCEPTS AND TECHNIQUES,”

OSU Publishing, Oregon, c2008.

Heisinger, Kurt and Joe Hoyle, “MANAGERIAL ACCOUNTING VOL 1,” Flat World
Education Inc, Washington, c2015.

www.wiley.com/college/sc/eldenburg/ch03.pdf

www.wyzant.com/resources/lessons/accounting/cost-volume-profit

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