OVERVIEW OF MANAGEMENT ACCOUNTING
MANAGEMENT ACCOUNTING VS FINANCIAL
DEFINITION
Management Accounting is the process of
identification, measurement, accumulation, analysis,
preparation, interpretation, and communication of
information that assists executives in fulfilling
organizational objectives.
Management Accounting is the application of
appropriate techniques and concepts in processing the
historical and projected economic data of an entity to
assist management in establishing a plan for reasonable
economic objectives and in making of rational decisions
with a view towards achieving these objectives.
OBJECTIVES OF MANAGEMENT ACCOUNTING
A. To select and provide information to all levels of
management in:
1. Planning, evaluating and controlling operations
2. Safeguarding the organization assets
3. Communicating with interested parties outside the
organization, such as shareholders and regulatory
bodies
B. To participate in the management process which
includes making strategic, tactical and operating
decisions and helping to coordinate the efforts of the
entire organization.
Strategic- long term
Tactical- things to do to achieve strategic
Operational- 1 year
ROLES OF MANAGEMENT ACCOUNTANTS
In most organizations, management accountants
perform multiple roles to implement strategies:
1. Problem solving (comparative analyses for decision
making and planning)- analysing, offering new product
2. Score-keeping (accumulating data and reporting
reliable results)- tallying the data, preparing
3. Attention-directing (helping managers properly focus
on problems and opportunities)- explaining it proper
authority, interpreting
RESPONSIBILITIES OF MANAGEMENT ACCOUNTANTS
Reporting- doing some analysis
Interpretation- interpreting the data
Resource management- if may value, alin mas valuable,
less valuable and safeguard
Information systems development- inputing data in
technology
Technological implementation- Efficient
Verification- Verifying if data is correct
Administration- Without Administration, it is difficult
to analyse the data
“STAFF” FUNCTION OF ACCOUNTANTS
The accounting function, financial and managerial, is
usually “staff” with responsibility for providing line
managers with specialized service including advice and
help in the areas of budgeting, controlling, pricing and
special decisions.
Line- Vertical
Staff- Horizontal
CONTROLLERSHIP VS TREASURERSHIP
Management by exception- you will only investigate
those who have significant effect in business operation
Management Accounting is not necessary about
money.
COST CONCEPTS AND CLASSIFICATIONS
Nature of Cost. Cost Pools, Cost Objects and Cost
Drivers
a cost may be defined as the value foregone or sacrifice
of resources for the purpose of achieving some
economic benefit which will promote the profit-making
ability of the firm. It is also an outlay or expenditure of
money to acquire goods and services that assist in
performing operations.
1. Expenditure incurred by a business to generate
revenue
2. Monetary value a company spend to produce a
product
3. Money spent to buy or acquire something
A cost object- anything for which cost is
computed/output/ pinagkakagastusan
A cost driver is any factor that has the effect of changing
the level of total cost.
Classifications of Costs
As to Cost Behavior
-Variable Cost
-Fixed Cost
-Semivariable Costs
As to Traceability
-Direct Costs- Direct Materials; Direct Labor
-Indirect Costs- Can’t trace economically
As to Controllability
-Controllable Costs-Subject to the influence of a
manager
-Noncontrollable costs-Beyond the influence
As to relevance to Decision Making
-Relevant Cost
-Standard Cost
-Opportunity Cost- Benefit Foregone
-Sunk Cost- irrelevant, for disposal
As to Element
-Material Cost
-Labor Cost
-Expenses/Overhead
As to Normality proportion proportion

-Normal- within range

-Abnormal- not tolerating those that are wasted
COST-VOLUME-PROFIT (CVP) ANALYSIS
As to function
-Production Cost CVP ANALYSIS
-Commercial Cost
A useful management tool that helps managers in
As to timing
planning for profit by way of a systematic analysis of the
-Product Cost- di pa binebenta
interrelationship among costs, volume (activity level)
-Period Cost- Nabenta na
and profit.

“All expenses are cost but not all cost are expenses” Factors Affecting Profit

CVP Assumptions
Relevant range and linearity assumptions in cost
behavior analysis are also assumed in CVP analysis
All costs can be categorized as fixed or variable.
Direct labor and overhead are often called conversion
Unless indicated otherwise, unit selling price is constant
costs since they are the costs of "converting or
even if sales volume changes
transforming"
Direct materials and direct labor are often referred to There is no change in the inventory levels during the
as prime costs period
Variable Costs
In case of a multi-product company, the proportions
Costs that change directly in proportion to (sales mix) of units sold will not change
changes in activity (volume) Direct labor and direct
materials are examples of variable costs. If not directly Labor productivity, production technology and market
proportion, we can’t identify it as a variable cost. conditions remain constant and stable
Fixed Costs
Contribution approach –simplified
Costs that remain unchanged for a given time
period regardless of change in activity (volume). Rent,
insurance on property, maintenance and repae of
buildings, and depreciation of factory

TVC+TFC = TC
UNITS x VCu=TVC
UNITS x TCu=TFC

High-Low Method
VCu=Highest Cost-Lowest Cost
Highest Activity- Lowest Activity
TFC=TC-TVC CVP-Related Terminologies
TFC= TC-(UNITS)(VCu) Contribution margin (CM) –is the difference between
VCu + FCu= TCu sales and variable cost. It is otherwise known as
marginal income, profit contribution, contribution to
REMINDER! fixed cost or incremental contribution
VCu- Constant
CM Ratio = CM/Sales or unit CM/Unit selling price
FCu- Change
TVC- Change CM Ratio = change in CM/change in sales
TFC- Constant

Units
VC FC CVP-Related Terminologies –BEP
Total Per unit Total Per unit
Increase in Decrease in
Increase direct Constant Constant direct
proportion proportion
Decrease Decrease in Constant Constant Increase in
direct direct
Break-Even Point (BEP) –a level of activity, in units
(break-even volume) or in pesos (break-even sales), at
which total revenues equal total costs. At the break-even
point, there is neither a profit or a loss.

BEP (units) = TFC/CMu

BEP (peso sales) = TFC/ CMR

CVP-Related Terminologies –Sales with Target Profit

Margin of Safety

Margin of Safety (MoS) is the difference between actual

sales (or planned sales) and breakeven sales.

It indicates the maximum amount by which sales could

decline without incurring a loss.

Margin of Safety = Sales –breakeven sales

Margin of safety ratio = Margin of safety / Sales

Application (Exercise 2)
Degree of Operating Leverage (DOL) BB Co. produces a merchandise that has the following
DOL measures how a percentage change in sales will data:
affect company profits. Sales Price P80 per unit
Variable cost P48 per unit
It indicates how sensitive the company is to sales volume Total Fixed Costs
increases and decreases. P640,000 per year
Units sold during the year 25,000 units
It is also known as operating leverage factor.
Requirement 1:
DOL = Contribution margin / Profit before tax Determine the Cmu, CMR and VCR.

Change in percentage in sales x DOL = Change in Answer 1

percentage in profit before tax Cmu= P32
CMR = 40%
MoS and DOL Example VCR = 60%

Requirement 2
Determine the breakeven point in units and in pesos.

Answer 2
BEP (units) = TFC/Cmu= P640,000/P32 = 20,000
units
BEP (pesos) = TFC/CMR = P640,000/40% =
P1,600,000

Requirement 3
Determine the margin of safety in units and in pesos,
and margin of safety ratio.
Requirement 4 VARIABLE COSTING- costing method that includes only
Determine the net profit ratio. variable manufacturing costs (DM, DL and variable FOH)
in the cost of a unit of product. It treats fixed
manufacturing overhead as a period cost. Also called
direct costing

PERIOD COSTS VS PRODUCT COSTS

Answer 4 (another solution)

NPR = MSR x CMR
NPR = 20% x 40% = 8% ABSORPTION COSTING VS VARIABLE COSTING

Requirement 5
Determine the Degree of Operating Leverage.

Answer 5
DOL = CM/Profit or EBIT
DOL = P800,000/P160,000
DOL = 5 times

Requirement 6
If sales is projected to increase by 20%, how much
would you expect profit to increase?

Answer 6
Increase in profit = DOL x percentage change in sales
Increase in profit = 5 x 20% NET INCOME BETWEEN AC AND VC
Increase in profit = 100%

Answer 6 (Continuation)
Thus, if sales of P2,000,000 will increase by 20%, or
to P2,400,000, then profit will double, (P160,000 x
100%, + P160,000) to P320,000.

Indifference Point Arguments For the Use of Variable Costing

Indifference point is the level of volume at which two • Variable costing reports are simpler and more
alternatives being analyzed would yield equal amount of understandable
total costs or profits. • Data needed for break-even and cost-volume-profit
analyses are
readily available
• The problems involved in allocating fixed costs are
eliminated
• Variable costing is more compatible with the standard
cost accounting
system
• Variable costing reports provide useful information for
VARIABLE AND ABSORPTION COSTING pricing
decisions and other decision-making problems
PRODUCT COSTING
encountered by
ABSORPTION COSTING- costing method that includes management.
all manufacturing costs (DM, DL and FOH) in the cost of
Arguments Against Variable Costing
a unit of product. It treats fixed manufacturing
• Segregation of costs into fixed and variable might be
overhead as a product cost. Also called full costing,
difficult,
conventional costing.
particularly in the case of mixed costs
• The matching principle is violated by using variable
costing which
excludes fixed overhead from product costs and charges
the same
period costs regardless of production and sales.
• With variable costing, inventory costs and other
related accounts,
such as working capital, current ratio, and quick ratio
are understated
because of the exclusion of fixed overhead in the
computation of
product cost.

RECONCILIATION OF OPERATING INCOME BETWEEN

AC AND VC