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BUS254 Managerial Accounting

Lecture topic
Introduction to managerial
accounting and
cost concepts
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What we will do today

– Introduction to the course

– Course expectations and housekeeping
– What is managerial accounting?
– Cost concepts and cost behaviours
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What is this course about?

Managers product costing

decision making
Management
accounting planning
information
control
performance
evaluation
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Textbook and lecture notes

Managerial Accounting, Tools for Business Decision-Making,

6th Canadian Edition
Weygandt, Kimmel, Kieso and Aly. Two options are available
(1) Ebook(Cheapest) option: WIleyPLUS student package
(WileyPLUS access with a built in e-text): ISBN
9781119731801.
(2) WileyPLUS + Loose Leaf Text (set): ISBN 9781119731818
The access code for Wileyplus is A16898(D100).
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Course components

 Lectures
 Tutorials
– Homework: solutions and reflections
– In-class participation
– In-class quiz

 Expectations
– During the term, participate in all the activities above
– Helps you prepare successfully for the mid-term and
final exam
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Organisation of tutorials
(a) Attendance at tutorials is mandatory. Formal assessments will
take place starting from the SECOND tutorial (week 3).
(b) Homework: Provide solutions and reflection. (Due before your
own tutorial)
(c) In-class group activity: You will be randomly assigned to a
group of four, with a leader each week. You are expected to
participate in the group discussion. Group members will get the
mark only when present for the group activity. If you are absent,
go to your group mates for the group activity sheet and solutions.
No emails of answers or the sheet will be provided.
(d) In-class participation: The tutor will go through some of the
homework questions and the in-class exercises for the group
activity. You have the opportunity to participate during these
sessions.

Self reading
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Where do I find the assignments?

 Go to Assignment on the left panel.

 You will see
– Homework due ddmmyyyy (click to submit homework)
– Quiz question hhmm
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Quiz answer sheet (provided by TA)

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Assessments
Type Percent Marking How marks are assigned

Homework 7.0% 1 mark per homework. Best 7 Strong attempt (full marks)
submissions. Average attempt (partial marks)
(i.e. 3 absences allowed for No attempt (0 marks)
whatever reason*)
Groupwork in 17.5% 2.5 marks per tutorial. Best 7 2 for correct answers and 1 for
tutorials groupwork. elaboration of answers
(i.e. 3 absences allowed for reflecting your discussion
whatever reason*) within group
Strong attempt(full marks),
Average attempt (partial marks)
No attempt(0 marks)
Tutorial 4.0% Questions and comments during first Very active(full marks),
participation part of tutorial Somewhat active (partial marks)
No participation(0 marks)

Mid-term 19.5% See below See below

Final Exam 52.0% See below See below

Total 100.0%
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Grading

Grade (200 A B C D,F,N

level course)
Beedie School
Average 16% 38% 36% 10%
(Range) (12%-20%) (32%-42%) (32%-46%) (0%-14%)

Approx. 50% Will get B- and above

Mid-term exam: 29 Oct (week 8 during lecture slot)

Final exam: Not available yet
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Academic dishonesty

 Cheating is academic dishonesty.

– Ask someone else (known or unknown) to complete your
work for you, or you copy from someone else.
 The consequences are severe if you are caught cheating. They
include failure for the course, failure with dishonesty in your
transcript and expulsion.
 If you want to do well, the TAs and instructor are available
for help. Please consult the TAs or the instructor regularly
to clarify your questions and make sure you go through all
the assigned questions.
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BUS254 Managerial Accounting

Lecture topic 1
MANAGERIAL ACCOUNTING
COST CONCEPTS
COST BEHAVIOURS
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WHAT IS MANAGERIAL
ACCOUNTING?
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Management accounting

 Managerial accounting information is produced for users within

the organization
 Financial accounting information is produced for users outside
the organisation (shareholders, creditors, government)
 Management accounting is "the process of identification,
measurement, accumulation, analysis, preparation,
interpretation and communication of information used by
management to plan, evaluate and control within an entity
and to assure appropriate use of and accountability for its
resources.” -Chartered Institute of Management Accountants
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Typical Managerial Functions

Source: Fundamentals of management Robbins and Decenzo, 2011.

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Examples of decisions under each

managerial function

 Planning
– What should the price of the new iPhone 13 be?*
– A restaurant is deciding whether it should go into the
take-out delivery business. To be competitive, an
average order must be priced at $12. Forty orders can
be served a night. Can the restaurant provide take-
outs at a cost of less than $12?*
 Organising
– What should the budget be for the movie Matrix 4?*
– How do we coordinate among the departments to
ensure that we achieve the sales target?
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Examples of decisions under each

managerial function (continued)

 Leading
– What monetary rewards to provide in order to ensure that
employees put in their best?
– How should employees be encouraged to take initiatives?

 Controlling

– How are the different divisions in the company performing? *

– How to ensure that employees do not take actions that are
harmful to the company?

*where having managerial accounting information will be

useful
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Examples of use of management

accounting in service organisations

 Hospitals: The average waiting time at the accident and

emergency clinic is about 4 hours. The hospital administrator
would like to know if setting up a 24h non-emergency walk-in
clinic would be viable.
 Westjet: Should it buy or lease aeroplanes?
 Fedex: How should it price its different services?
 BCE: How many households must subscribe to its satellite TV
before making profits?
 University: How much does it cost to train a business student?
an engineering student?

Self reading
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Managerial vs Financial Accounting

Financial Managerial
1. Users of Parties outside the Managers within
information organisation organisations

2. Regulations • Accounting • None, however if

standards, stock information is
exchange ultimately published,
regulations. then regulated.
• Audited • Audit not needed.
3. Time focus Historical Future & historical

4. Time span Yearly , semi-annual Flexible, when need

or quarterly arises. Usually more
regular
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Managerial vs Financial Accounting

Financial Managerial
5. Sources of data Accounting system Accounting system
and other sources

6. Nature of reports • Entire • Subunits,

organisation and departments
operating
segments • Historical,
• Mainly historical estimates

7. Behavioural impact How measurement How reports affect

and reports affect managers’
investors’ behaviour behaviour
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Uses of managerial
accounting information

Inventory valuation and Decision Planning, control and

profit measurement making performance measurement

Cost volume
Cost profit Budgeting planning
concepts analysis, and control
break even
Job order
costing Incremental Responsibility
analysis accounting
Activity based
costing Pricing Variance
decisions analysis
Alternative
inventory
costing
methods
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MANUFACTURING A
PRODUCT

https://www.youtube.com/watch?v=AhkDh3kaqu8
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Let’s review: Chocolate factory

 Cocoa
 Machines
 People
 Lighting
 Packaging
 Tables
 Power
 Overalls worn by people

 Identify, classify the cost and trace them to product (chocolates)

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Managerial accounting system

 A managerial accounting system has two functions

– Accumulates cost by its nature such as labour, materials,
overheads
– Assigns these costs to cost objects
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COST CONCEPTS
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Cost concepts

 The term ‘cost’ has special meaning in managerial accounting

 Cost is a sacrifice of resources.
– Example:
» What is the cost of producing burger? a computer?
» What is the cost of staging concert?
» What is the cost of educating a student in SFU?
 A cost object is any activity for which a separate measurement
of cost is desired.
– Cost objects can be a product, a service, a project, a
division, a department, a firm.
 What are the cost objects in the above examples?
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Cost versus expense

 Cost versus expense

– Expense is a concept used in Financial Accounting.
– Expense is defined as the outflow of resources used to earn
revenue during a period.
– Example:
» Salaries of workers, depreciation, insurance, rental
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Basic cost concepts

 Direct/indirect costs
 Product and period costs
 Variable and fixed costs
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Direct and Indirect costs

 Direct costs are costs that are specifically and exclusively

incurred by the particular cost object.
– E.g. manufacture chocolates (cost object): direct costs:
cocoa, sugar, wages of bakers
 Indirect costs are costs that do not meet the direct cost
criterion.
– E.g. Cost of maintenance of the factory, factory
administration costs, cleaning costs
– Indirect costs are also known as overhead
 Distinction is important in the costing of products and services
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Direct and indirect costs (continued)

 There are costs that meet the direct cost criterion but are
treated as indirect cost because it is NOT cost effective to
trace them to the cost object.
– E.g. the cost of glue, oil, nails, nuts and bolts.
 Meaning of cost-effectiveness:
– Cost : recording, collating
– Benefits: accuracy, better decision making
 Cost of manufactured product
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(Product cost)

Cost of
manufactured
product

Direct Manufacturing
Direct labour
materials overheads

Direct costs Indirect costs

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Let’s review

 What direct and indirect costs of producing a pair of

shoes?
– Direct cost
» Direct materials: Leather, shoe string, sole
» Direct labour: wages of factory workers
– Indirect cost
» Manufacturing Overhead: Thread, trimmings, factory
supervisor’s salary, rental of factory.
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Cost of manufactured product

Cost of
manufactured
product

Direct Manufacturing
Direct labour
materials overheads

Indirect
materials

Indirect labour

Other
manufacturing
costs
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Classifying manufacturing cost

into direct and indirect
 Direct costs
– Direct material: Raw material used in the manufacturing
process and can be traced in a cost-beneficial way to
products.
– Direct labour: Cost of salaries, wages and fringe benefits of
personnel who work directly on manufactured products
 Indirect costs
– Manufacturing overhead, which comprises indirect labour,
indirect materials and other manufacturing overhead.
» Indirect material: E.g. Nails, glue, paint
» Indirect labour: E.g. Salaries of production supervisor.
» Other manufacturing cost: E.g. Property tax and
insurance on factory, depreciation of factory,
maintenance, engineering
Self reading
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Let’s review

What are three main categories of cost for a box of

chocolates?
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Let’s review (solution)

What are three main categories of cost for a box of
chocolates?
Cost of
manufactured product (box of
chocolates)

Direct Manufacturing
Direct labour
materials overheads
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Cost of manufactured product

Cost of
manufactured
product

Direct Manufacturing
Direct labour
materials overheads
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Cost of manufactured product

Cost of
manufactured
product

Direct Manufacturing
Direct labour
materials overheads

Prime cost Conversion costs

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Manufacturing department

Manufacturing
Vice-president

Receving Inspection Tool room Production Production Maintenance

and Storage Superintendent control

Cutting Stamping Machining Welding & Finishing

assembly
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Manufacturing company

Typical Manufacturing Firm

PRESIDENT

Sales VP Engineering VP Manufacturing VP Administration VP Financial VP

Branch Sales Manager Chief Designer Human resource Treasurer

Research Scientist Legal Services Controller

Maintenance
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Product versus Period Costs

2
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Product and period cost

 Whether the cost is assigned to the product.

– Distinction is important in costing inventory for external
reporting
 Product cost: Cost assigned to goods that are either
purchased for resale or manufactured for sale.
– Also known as inventoriable cost
– E.g. Direct material cost, depreciation of factory building

 Period cost: All costs that are not assigned to the product.
Charged to current period’s income statement.
– E.g. Administrative expenses, selling expenses, R&D
expenses

Self reading
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Variable Costs

 Costs that vary in total directly and proportionately with

changes in the activity level
– That is, if the activity level increases 10%, total variable
costs increase 10%; If the activity level decreases by 25%,
total variable costs will decrease by 25%
 Examples of variable costs
– Direct material and direct labour for a manufacturer
– Sales commissions for a merchandiser
– Gasoline in airlines and trucking companies
 Variable costs also remain constant per unit at every level of
activity

2
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Fixed Costs

 Costs that remain the same in total regardless of changes in

the activity level within the relevant range.
 Examples include:
» Property taxes
» Insurance
» Rent
» Deprecation on buildings and equipment
 Per unit cost varies inversely with activity:
– As volume increases, unit cost decline, and vice versa

 Distinction between fixed and variable costs is very

important in management accounting

2
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How do fixed and variable cost vary?

Fixed
Variable
Variable
Fixed

Output Output
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Relevant Range

 Defined as the range of activity over which a company expects

to operate during a year
 Within this range, a straight-line relationship usually exists for
both variable and fixed costs
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Semi variable and Step costs

Output
Output

Semi-variable (or Semi-fixed cost

mixed cost) (or step cost)
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Semi variable and Step costs

 Is the distinction between fixed cost and variable cost always

clear?
 Semi-variable cost (or mixed costs)
– Costs that have a portion fixed and another portion that
varies with usage.
– Eg. Mobile phone charges
 Semi-fixed cost (or step cost)
– Costs that stay fixed within a certain activity range but
changes when the range is exceeded.
– Eg. Salary of supervisors
Self reading
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Manager focus: High-Low Method

 Mixed cost must be classified into their fixed and variable

components
 Step 1: Determine variable cost per unit using the
following formula:
Change in Total Change in activity
costs (between level (between Variable cost per
high and low ÷ high and low = unit
activity) activity)

 Step 2: Determine the fixed cost by subtracting the total

variable cost at either the high or the low activity level from the
total cost at that level

2
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High-Low Method: Example

 Data for Metro Transit Company for the last 4-month period:
Month Kilometres Total Cost Month Kilometres Total
Driven Driven Cost
January 40,000 $30,000 March 70,000 $49,000
February 80,000 48,000 April 100,000 63,000
 Question: Estimate the maintenance cost for an activity
level of 45,000 km
Solution
Step 1: Determine variable costs per unit

High Level of Activity: April $63,000 100,000 km

Low Level of Activity: January 30,000 40,000 km
Difference $33,000 60,000 km
$33,000 ÷ 60,000 = $0.55 variable cost per km
2
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High-Low Method: Example (continued)

Step 2: Subtract total variable costs at either the high or low activity
level from the total cost at that same level

Activity Level
High Low
Total Cost $63,000 $30,000
Less: Variable costs
(100,000 x $.55) 55,000
(40,000 x $.55) 22,000
Total fixed costs $ 8,000 $ 8,000

Answer: The estimated maintenance costs would be $8,000 fixed

and $24,750 variable ($.55 X 45,000 km) for a total of $32,750.
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Concepts checklist

Have you understood the following?

 What is management accounting?
 Why do we need management accounting information?
 What are the differences between management accounting and
financial accounting?
 What are some decisions that managers make that require
accounting information?
 What are service organizations and how can managerial
accounting information help managers in these organisations?
 What are direct/indirect costs? Variable/fixed costs?
Product/period costs?
 How do you separate out the fixed and variable components in
mixed costs?
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Excercise : Identify these costs

 Leasing cost of photocopier. Flat fee of $300 per month and

$0.01 per copy.
 Cost of wood at $10.00 per square metre for the manufacture of
kitchen cabinets.
 Wages of delivery truck drivers. A truck driver can provide
100km of service a day.
 Rental for factory building. Lease contract lasts till year 2004.

Ans: Semi-variable, variable, fixed, fixed