Introduction to Managerial Accounting ➢ Organizational Structure and the

The Institute of Management Roles and Skills required of

Accountants describes management
accounting as “a profession that involves
partnering in management decision
making, devising planning and
performance management systems, and
providing expertise in financial reporting
and control to assist management in the
formulation and implementation of an
organization’s strategy.
➢ Manager’s Responsibilities
• Decision Making
Good Decision Making are derived from
tireless accession and assessment of
information. With good decision becomes a
good business value.
1. Planning
- Formulating long and short-term
plans
- Planning is the communication of
company’s goals.
- It’s achieved during the budgeting
process.
- Budgets are the financial plans.
- Budgets identify the source.
- Setting Goals and Objectives
2. Directing
- Implementing Plans
- Overseeing day-to-day operations
- They must delegate roles and
responsibilities. Guide the employees
on how to accomplish their chores,
motivate and inspire them until the
fulfillment of the task, and to respond
to employee’s queries on how to pull
off their task.
3. Controlling
- Measuring performance
- Comparing actual to planned
performance.
- Evaluating results of Operation
- Keeps all the business activities on
track and identifies if the company’s
objectives are met.
- Feedback in the form
performance reports that compare
actual results with the budget is an
essential part of the control function.
Management Accountants in the
Organization
• The internal audit department report
tot eh CFO or CEO for day-to-day
administrative matters. This internal
audit department also reports to a
subcommittee of the board of
directors called the audit committee.
• Roles
o Impact of Technology
o Ensuring Accurate financial
records
o Planning, analyzing and
interpreting accounting data.
o Providing decision support
• Skills
o Knowledge of financial and
managerial accounting
o Analytical Skills (Critical Thinking)
o Knowledge of how a business
function
o Ability to work on a team.
o Oral and Written Communication
Skills
➢ Institute of Management
Accountants (IMA)
- the professional association for
management accountants.
- The goal of the IMA is to advance the
management accounting profession
primarily through certification,
practice development, education,
and networking.
o Competence
o Confidentiality
o Integrity
o Credibility
• Trends in the Business Environment
- Competing in global marketplace
- Time-based competition
- Advanced Information System
- E-commerce
- Just-in-time Management
of - Total Quality Management
- ISO Certification
- Cost benefit analysis
Introduction to Cost Terms and Purposes
o Cost
- A resource sacrificed or forgone to
achieve a specific objective.
o Actual Cost
- The cost incurred (historal cost) as
distinguished from budget costs
o Cost Object
- Anything for which a separate
measurement of cost is desired
➢ Cost Classification for Predicting Cost
Behavior
o Variable Cost – change when activity
changes
- Ex. Your total texting bill is based on
how many texts your send
o Fixed Cost – remain unchanged
when activity changes
- Ex. Your monthly contract fee for your
phone is fixed.
➢ Cost Behavior Patterns Example
Ex. Bicycles by the Sea buys a handlebar
at $52 for each of its bicycles.
- What is the total handlebar cost
when 1,000 bicycles are assembled?
1,000 units × $52 = $52,000
- What is the total handlebar cost
when 3,500 bicycles are assembled?
3,500 units × $52 = $182,000
➢ Cost Drivers
- The cost driver of variable costs is the
level of activity or volume whose
change causes the (variable) costs to
change proportionately.
➢ Manufacturing
- Purchase materials and components
and convert them into finished
goods.
- Must develop, design, market, and
distribute its products.
o Balance Sheet
1. Inventoriable Costs (Material
Inventory)
2. Work in Process Inventory
3. Finished Goods Inventory (when
sales occur)
o Income Statement
1. Revenue - Cost of Goods Sold =
Gross Margin
2. Gross Margin - Period Cost =
Operating Income
➢ Merchandising
- Purchase and then sell tangible
products without changing their
basic form
o Balance Sheet
1. Inventoriable Costs (Merchandise
Purchases)
2. Inventory (when sales occur)
o Income Statement
1. Revenue - Cost of Goods Sold =
Gross Margin
2. Gross Margin - Period Cost =
Operating Income
➢ Service
- Provides services or intangible
products to their customers
- Labor is the most significant cost
category
➢ Type of Inventory
• Manufacturing-sector companies
typically have one or more of the
following three types of inventories:
1. Direct materials inventory
2. Work in process inventory (Work in
progress)
3. Finished goods inventory
• Merchandising-sector companies
hold only one type of inventory – the
product in its original purchased form.
• Service-sector companies do not
hold inventories of tangible products
➢ Classification of Manufacturing Costs
o Direct materials Costs
o Direct manufacturing labor costs
o Indirect manufacturing costs
➢ Inventoriable Costs
o Inventoriable Costs (Assets)
o Become cost of goods sold
o After a sale takes place
➢ Period Costs
- All costs in the income statement
other than cost of goods sold
- Recorded as expenses of the
accounting period in which they are
incurred.
➢ Prime Costs
Direct Materials + Direct Labor = Prime
Costs
➢ Conversion Costs
Direct Labor + Manufacturing Overhead
= Conversion Costs
➢ Manufacturing Cost Requires
Judgement
- Classifications vary among
companies.
1. Direct manufacturing labor
2. Manufacturing overhead
- Overtime premium is usually
considered part of overhead
➢ Many meanings of product cost
A product cost is the sum of the costs
assigned to a product for a specific
purpose.
1. Pricing and product emphasis
decisions
2. Contracting with government
agencies
3. Preparing financial statements for
external reporting under generally
accepted accounting principles
➢ A framework for Cost Management
1. Calculating the costs of products
2. Obtaining Information
3. Analyzing Information
Cost Behavior agreement, laws, incurrence may
past actions, and be influenced by
- How the activities of an business entity the discretion of
organization affect its costs. management
- A manner in which expenses are Examples: Rent, Examples:
impacted by changes in business Insurance, Research &
activity Executive Development,
- Depends on management Salaries, Property Fixed Portion of
decisions which determines cost Tax Advertising
behavior
- The analysis refers to Example:
management’s attempt to
understand how operating costs
change in relation to a change in
an organization’s level of activity
Variable Fixed Mixed
Cost Cost Cost

Cost that Cost that Mixed of

change in do not variable
total change in cost (VC)
proportion to total, and Fixed Points to remember:
the change in regardless Cost (FC)
- Discretionary fixed costs are
quantity level of change
in quantity costs fixed at certain levels only
level because management decided
Remains Inversely that these levels of cost should
constant per change be incurred to meet the
unit level per unit organization’s goals.
with - Discretionary fixed costs have no
respect to obvious relationship to levels of
change in output activity but are determined
quantity as part of the periodic planning
level process
Examples: Examples: Examples: - Each planning period,
Direct Rent, Internet
management will determine how
materials, insurance, Fee,
much to spend on discretionary
direct labor, property standard
variable taxes access fee items. These costs then become
marketing & + fixed until the next planning
administrative broadband period.
expense usage fee,
income tax
Relevant Range
Kinds of Fixed Cost - The range of activity where the
assumption for cost behavior is
- Cost that do not change in total
reasonably valid
- 2 kinds: Committed &
- Assumed that within the relevant
Discretionary
range the following are constant:
Committed Discretionary a) total fixed cost and b) variable
Fixed Cost Fixed Cost unit rate
Incurrence Incurrence has - Total fixed cost is assumed
depends on been budgeted constant and total variable cost
contract, but actual changes

1. Relevant Range for ABC Co. is at
1 to 10,000 units. Within this
range the following cost remains
constant, a) DM per unit: Php 5,
b) DL per unit: Php 300, c) Total
FC: Php 500,000
2. Within the relevant range, FC per
unit is inversely related to the
number of units produce by ABC.
Mixed Cost
- A combination of variable and
fixed cost
- Can be classified as semi-
variable cost, semi-fixed cost,
and step cost
- Y = a + bx
Y: Total Cost
a: Fixed Cost
b: Variable Cost
x: number of units in activity
Step Cost
- A cost that does not change
steadily with changes in activity
volume, but rather at discrete
points
- A fixed cost within certain
boundaries, outside of this
boundaries cost will change.
At a production of 500 or 750 pens, only
1 machine is required which incurs a
total cost of $15,000. However, at the
production of 1,500, the company must
purchase an additional machine to meet
the required capacity. At a production of
1,500 pens, the total cost is $30,000
($15,000 x 2).
When stated on a graph, step costs
appear to be incurred in stair step
pattern, with no change over a certain
volume range, then sudden increase,
then no change over the next (and
higher) volume range, then another
sudden increase, and so on.
• Step costing helps business
entity understand that as
operational activity grows there
will be large incremental cost to
consider.
• Step cost helps business entity
assess whether the beneficial
outcome of the additional
increase of operation outweighs,
or at least covers, the
incremental cost that goes with it.
Cost Functions
- Used by managers as a planning
tool and control tool.
 - Planning and controlling the
activities of an organization
require useful and accurate
estimates of future fixed and
variable costs.
Cost measurement involves estimating
or predicting costs as a function of
appropriate cost drivers.
Cost drivers are measures of activities
that require the use of resources and
thereby cause of costs.
Understanding relationships between
costs and their cost drivers allows
managers to:
- Make better operating, marketing,
and production decisions
- Plan and evaluate actions
- Determine appropriate costs for
short-run and long-run decisions
Cost Functions
- The first step in estimating or
predicting costs is measuring
cost behavior as a function of
appropriate cost drivers.
- The second step is to use these
cost measures to estimate further
costs at expected levels of cost-
driver activity.
Cost Function Equation
Y: total cost; a: fixed cost; b: variable
cost per unit; x: cost-driver activity in
number of units
Y = a + bx
Y = a + bx
Y = Php 100,00 + [(Php 250)(100)]
= Php 100,000 + Php 25,000
= Php 125,000
The mixed-cost function is called linear-
cost function.
Developing Cost Function
Plausibility
- The cost function must be
believable.
- Chances of it happening is HIGH.
Reliability
- A cost function’s estimates of
costs at actual levels of activity
must be reliable to conform with
actually observed costs.
- Historical data to support.
Choice of Cost Drivers: Activity
Analysis
- Choosing a cost function starts
with choosing cost drivers.
- Managers use activity analysis to
identify appropriate cost drivers.
- Activity analysis directs
management accountants to the
appropriate cost drivers for each
cost.
Methods of Measuring Cost
Functions
1. Engineering Analysis
2. Account Analysis
3. Scattergraph analysis
4. High-Low Analysis
5. Least Squares Regression
Method
Engineering Analysis
- Measures cost behavior
according to what costs should
be, not what costs have been
- Entails a systematic review of
materials, supplies, labor, support
services, and facilities needed for
products and services
Account Analysis
- Selects a plausible cost driver
and classifies each account as a
variable or fixed cost
Example: What is the fixed cost?
b = Total Mixed Cost – Total Variable
Cost
At high value:
b = $47,000 – ($8.1081 x 4900 days)
= $47,000 - $39, 730

3,700 patient-days = $7,270

Fixed cost per month: $9,673 At low value:

Variable cost per patient-day b = $17,000 – ($8.1081 x 1,200 days)

= $27,750÷3,700 = $17,000 - $9,730

= $7.50 per patient-day = $7,270 a month

Y= $ 9,673 + ($7.50 x patient-days) Cost Function measured by high-low

method:
Y = $7,270 per month + ($8.1081 x
High-Low Method patient-days)
- Focus on the highest- and
lowest- activity points
- Based on the premise that a High-Low Method Example:
change in costs is attributed to
the change in VC, FC being
assumed constant
Example:
High Month: Low Month:
April September
Maintenance Maintenance
Cost: $47,000 Cost: $17,000
The point at which the line intersects the
Number of Number of Y axis is the intercept, a, or estimate of
patient-days: patient-days: Fixed Costs, and the slope of the line
4,490 1,200 measures the variable cost.

What is the variable cost (V)?

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐶𝑜𝑠𝑡𝑠
𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠 =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦
($47,000 − $17,000)
𝑉=
(4,900 − 1,200)
$30,000
𝑉=
3,700
= $8.1081