ACCT 5002

Managerial Accounting
Introduction
Managerial Accounting
• Process within the organization that aids managers in the
planning, organizing and controlling the organizations
activities.
Managerial versus Financial Accounting
Managerial Accounting Financial Accounting
Users of information Managers within company Interested outside parties
Regulation Required. Must comform to
Not required because for internal
GAAP which is regulated by CPA
use only
and Securities commission
Basic accounting system plus Almost exclusively from the
Source of Data
various other sources basic accounting system
Reports often focus on subunits. Reports focus on the enterprise
Nature of Reports Based on a combination of in its entirety. Based on
and Procedures historical data, estimates, and historical transactions.
projections of future events.
 Strategy Overview

THE FIRM THE

Goals & Values INDUSTRY
ENVIRONMENT
Resources &
Capabilities
STRATEGY •Competitors
Structure & STRATEGY •Customers
Systems
•Suppliers

The The
Firm-Strategy Environment-Strategy
Interface Interface

4
SWOT Analysis
• The PESTEL analysis analyzes the
Strength Weakness
external environment to see if there are
- Resources or Skills
potential “Opportunities” or “Threats”. - Abilities, Skills,
needed, limitations,
Resources,
• We also need to take an “Objective” lack of
Experience
cash/distribution
look at our internal resources and
capabilities to determine if they are
potential “Strengths” or “Weaknesses”.
Opportunities Threats
• We can then map these together to - Positive Trends,
form a SWOT analysis. - Risks, Change in
Training, Technology Consumer trends or
advancements, New government
Markets regulations
 The
The Porter
Porter Value
Value Chain
Chain

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT SUPPORT
ACTIVITIES
PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING

SERVICE
PRIMARY
LOGISTICS LOGISTICS & SALES ACTIVITIES

6
Five Business-Level Strategies

SOURCE: Adapted with the

permission of The Free Press, an
imprint of Simon & Schuster Adult
Publishing Group, from Competitive
Advantage: Creating and
Sustaining Superior Performance,
by Michael E. Porter, 12. Copyright
© 1985, 1998 by Michael E. Porter.
Figure 4.1
What is the purpose of a Managerial Accounting performance
measurement system?
• A performance measurement system is a system designed
to establish whether you are achieving the strategic goals
and objectives of the organization.
– Beyond just a costing system.
• It should help you to use the organizational resources more
efficiently and effectively.
• It should help to determine performance (ex post) and allow
you to plan (ex ante)
• Enhance corporate governance.
How? Using Planning & Control Systems
• Planning: choosing goals and deciding how to attain them,
communicating goals
– Budget: quantitative expression of a plan
• Control: implementing planning decisions and evaluating
actual against expected results
– Variance: difference between actual and expected amounts
– Management by exception: Concentrate on areas not meeting
expectations
– Managing Risk
ACCT 5002
Managerial Accounting
Cost Terminology
 Basic Cost Terminology
• Cost: a resource sacrificed or foregone to achieve a specific objective
– Usually measured as a monetary amount paid

• Period Cost
– All costs incurred to generate revenue in a specific time period except costs of goods sold.
Little evidence of future benefit, therefore expensed in the period incurred
• Product (Inventoriable) Costs: the accumulation of all costs to manufacture or purchase
inventory for resale

• Cost Object
– Any “object” such as a product, machine, service, or process for which cost information is
accumulated
– Can vary in size from an entire company, to program within the company, or down to a
single product or service
 Direct and Indirect Costs
• Direct Cost: can be traced to a cost object
– The existence of the object causes the direct cost
– Direct materials (DM) costs are inventoriable costs incurred to acquire production materials
– Direct manufacturing labour (DML) costs are inventoriable costs for production labour; part
of COGS
– Other Direct labour (DL) costs (ex. Services) that can be traced to the cost object are also
part of Cost of Sales, but may not be inventoriable, as a service cannot be stored.
• Indirect Cost: cannot be traced to a cost object
– Manufacturing overhead: all indirect inventoriable costs
– Indirect costs are allocated to cost objectives
Prime & Conversion Costs
• All inventoriable costs are either prime or conversion
• Prime costs include DM and DL
• Conversion costs include DL and MOH (converts raw
materials to a finished product)

• DM (Direct Material)
• DL (Direct Labour)
• MOH (Manufacturing Overhead)
Product Costs, Period Costs and Expenses

Product costs are costs associated with goods for

sale until the time period during which the products
are sold, at which time the costs become expenses.

Period costs are costs that are expensed during the

time period in which they are incurred.

Expenses are the consumption of assets for the

purpose of generating revenue.
Cost Classifications on Financial Statements –
Income Statement

Product Costs Period Costs

Cost of Goods Sold Operating expenses

15
Manufacturing (Production)
Costs

Direct Direct Manufacturing

Material Labour Overhead

The
Product
Manufacturing Cost Flows
Direct Material
Work in
Direct Labour Process
Inventory
Manufacturing
Overhead
Finished Cost of
Goods Goods
Inventory Sold
ACCT 5002
Managerial Accounting
Cost of Goods Manufacturing Schedule
Cost of Goods Manufactured
Schedule
Schedule of Cost of Goods Manufactured
(The WIP T-Account)

Comet Computer Corporation

Schedule of Cost of Goods Manufactured

Raw material used $ 134,980

Direct labour incurred 50,000
Total manufacturing overhead allocated 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
Schedule of Cost of Goods Manufactured
Computation of Cost of Raw Material Used

Raw-material inventory, January 1 $ 6,000

Add: Purchases of raw materials 134,000
Raw material available for use 140,000
Deduct: Raw material inventory, December 31 5,020
Raw material used $ 134,980
Comet Computer Corporation
Schedule of Cost of Goods Manufactured

Raw material used $ 134,980

Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
Schedule of Cost of Goods Manufactured
(con’d)
Include all direct labour
costs incurred during the
Cometcurrent period.
Computer Corporation
Schedule of Cost of Goods Manufactured

Raw material used $ 134,980

Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
 Computation of Total Manufacturing Overhead
Indirect material $ 10,000
Indirect labour 40,000
Depreciation on factory 90,000
Depreciation on equipment 70,000
Comet Computer Corporation
Utilities 15,000
Insuranceof Cost of Goods Manufactured
Schedule 5,000
Total manufacturing overhead $ 230,000
Raw material used $ 134,980
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
Schedule of Cost of Goods Manufactured
(con’d)
Beginning work-in-
Ending work-in-process process inventory is
inventory contains the cost carried over from the
Comet Computer Corporation
of unfinished goods, and is prior period.
Schedule of Cost of Goods Manufactured
reported in the current assets
section of theused
Raw material balance sheet. $ 134,980
Direct labor 50,000
Total manufacturing overhead 230,000
Total manufacturing costs $ 414,980
Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 100
Cost of goods manufactured $ 415,000
Income Statement for a Manufacturer

Comet Computer Corporation

Income Statement
For the Year Ended December 31, 20X2
Sales revenue $ 700,000
Less: Cost of goods sold 415,010
Gross margin $ 284,990
Selling and administrative expenses 174,490
Income before taxes $ 110,500
Income tax expense 30,000
Net income $ 80,500
 Comet Computer Corporation
Schedule of Cost of Goods Sold
For the Year Ended December 31, 20X2

Finished-goods inventory, Jan. 1 $ 200

Add: Cost of goods manufactured 415,000
Cost of goods available for sale 415,200
Comet Computer Corporation
Deduct Finished-goods inventory, Dec. 31 190
Cost of goods sold Income Statement $ 415,010
For the Year Ended December 31, 20X2
Sales revenue $ 700,000
Less: Cost of goods sold 415,010
Gross margin $ 284,990
Selling and administrative expenses 174,490
Income before taxes $ 110,500
Income tax expense 30,000
Net income $ 80,500
ACCT 5002
Managerial Accounting
Cost Behaviour
 Variable and Fixed Costs
Variable Cost $
• A cost that is constant per unit but changes in total in proportion
to changes in the cost driver (activity) within the relevant range
• Materials (parts), fuel costs for a trucking company, line
employee wages
Volume

Fixed Cost $
 A cost which does not change in total as
volume changes but changes on a per-unit basis
as the cost driver increases and decreases
within the relevant range
 Amortization, insurance, real estate taxes, Volume
supervisor salary
Relation of Unit Costs to Volume
Slide 16-5

Unit
UnitCost
Cost==Total
TotalCost/Volume
Cost/Volume
$12 -
$10.00
$10.00 ==
11 - $1,000/100
$1,000/100
10 - $8.00 ==
$8.00
9 - $1,600/200
$1,600/200
8 - $7.00
$7.00 ==
$2,800/400
Cost

7 - $2,800/400
$6.40
$6.40 ==
6 - $6,400/1,000
$6,400/1,000
1 - $6.20 ==
$6.20
0 - | | | | $12,400/2,000
$12,400/2,000|
100 200 400 1,000 2,000
Volume (units)
 Slide 16-6
Relevant Range

$2,000 - Relevant range

Total cost:
1,600 - TFC +
(UVC*X)
1,200 - Variable
Cost

portion:
800 - (UVC*X)

400 - UVC
Fixed portion:
0 - TFC
TFC
50 100 150 200 250
Volume (X)
Estimating the Cost-Volume Relationship
Slide 16-8

How do I
estimate fixed
Four methods for
and variable cost? estimating total fixed
cost and unit variable
cost
• Judgment
• High-low method
• Scatter diagram
• Linear regression
High-Low Method
• Cost estimation technique used to split mixed costs into
component VC and FC proportions:
• Utilizes cost of a line formula: Y = a + bx
b = variable cost = change in total activity
change in activity level
a = fixed cost portion
x = activity base or cost driver
y = total cost
High-Low
High/Low Method Slide 16-12
method: Costs are accumulated for a fishing
lodge maintenance and cost driver (number of guests)

Month
Month Costs
Costs Volume*
Volume*
July
July $1,400
$1,400 1,000
1,000
August
August 1,700
1,700 1,100
1,100
September
September 1,500
1,500 900
900
October
October1,300
1,300 800
800
* High November 1,500 1,200
November 1,500 1,200
* Low December
December 1,300
1,300 700
700
Variable
VC =
$1,500 - $1,300 cost is
1,200 - 700 $0.40 per
unit
 Slide 16-13

Fixed
FixedCost
Cost

Total Cost = Total Fixed Cost + Unit Variable Cost (X)

$1,500 = Total Fixed Cost + $0.40 (1,200)
$1,020 = Total Fixed Cost
Cost Formula = Y = ax + b
= $0.40x +
$1,020
The High-Low Method Question 1
If sales commissions are $10,000 when 80,000 units are sold and
$14,000 when 120,000 units are sold, what is the variable
portion of sales commission per unit sold?

a. $.08 per unit

b. $.10 per unit
c. $.12 per unit
d. $.125 per unit
The High-Low Method Question 1
If sales commissions are $10,000 when 80,000 units are sold and
$14,000 when 120,000 units are sold, what is the variable
portion of sales commission per unit sold?

a. $.08 per unit

b. $.10 per unit
c. $.12 per unit
d. $.125 per unit
The High-Low Method Question 2
If sales commissions are $10,000 when 80,000 units are sold and
$14,000 when 120,000 units are sold, what is the fixed portion
of the sales commission?

a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
The High-Low Method Question 2
If sales commissions are $10,000 when 80,000 units are sold and
$14,000 when 120,000 units are sold, what is the fixed portion
of the sales commission?

a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
 Activity Scatterplot Method
Cost

$4,000
Important: Cost function is only
.
relevant within relevant range
.
3,000

2,000
. Analyst can fit line

.
based on his or her

.
experience
1,000

0
100 200 300 400 500
Activity Hours
Cost Behaviour Analysis
Mixed Month
Costs Kilometres
– High-Low Total Cost
Method: Example
Kilometers Total Cost

• Data for Metro40,000

January Transit Company
90,000 $58,000
for the last 8-month
$30,000 May period:
February 80,000 48,000 June
80,000 52,000
March 70,000 49,000
July 75,000 50,000
April 100,000 63,000 August
60,000 44,000

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

• Step 1: Variable cost = Change in Cost  Change in activity

= ($63,000 - $30,000)  (100,000 – 40,000)
Using the formula, = $33,000  60,000 = $.55 variable cost
per km
 Cost Behaviour Analysis
Mixed Costs – High-Low Method:

• 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
Cost Function
• Y = mx + b
• Y = Total Cost
• m = Slope of the line
• X = Variable Cost
• b = Fixed Cost
• Y = $0.55 x + $8,000

EXAMPLE: If the activity level is 45,000 km, the estimated maintenance costs
would be :
Y = $0.55 (45,000) + $8,000 = $32,750.
 HIGH-LOW METHOD
The following materials handling costs and moves have been observed
during the past seven months:

Moves Handling Costs

10* $ 150
20 200
30 300
40 350
50 400
60 450
70** 500
* Low point
** High point

43
 HIGH-LOW METHOD

VC = change in cost / change in

activity
= $500 - $150
70 - 10
= $5.83 per move

FC = TC - VC x
= $500 - ($5.83 X 70) = $91.90

TC = FC + VCx
= $91.90 + $5.83x = $500

44
ACCT 5002
Managerial Accounting
Regression Analysis
Regression Analysis (1 of 2)
• Regression analysis is a statistical method that measures
the average amount of change in the dependent variable
associated with a unit change in one or more independent
variables.
• Is more accurate than the high-low method because the
regression equation estimates costs using information from
all observations; the high-low method uses only two
observations.
Types of Regression
• Simple — estimates the relationship between the
dependent variable and one independent variable
• Multiple — estimates the relationship between the
dependent variable and two or more independent variables
Sample Regression Model Plot
• Exhibit 10-6 Application of a Cost Function in the Relevant Range
Regression Terminology
• Goodness of fit — indicates the strength of the relationship
between the cost driver and costs
• Residual term — measures the distance between actual
cost and estimated cost for each observation
Nonlinear Cost Functions (1 of 2)
• A cost function for which the graph of total costs in not a straight line within
the relevant range
• Economies of scale and quantity discounts
• Step cost functions — resources increase in “lot-sizes”, not individual units
• Learning curves — labour hours consumed decrease as workers learn their
jobs and become better at them
• Experience curve — broader application of learning curve that includes
downstream activities including marketing and distribution
Nonlinear Cost Functions (2 of 2)
• Exhibit 10-7 Forms of Cost Functions