CHAPTER 1: ROLE, HISTORICAL PERSPECTIVE AND DIRECTION OF

MANAGEMENT ACCOUNTING MANAGEMENT ADVISORY SERVICES

 providing of professional (consulting) services by independent accounting firms
FINANCIAL ACCOUNTING  primary purpose is providing advice and technical assistance to help improve the
 provides information to external users such as creditors, shareholders and other client’s use of its capabilities and resources to achieve the objectives of the
stakeholders. organization.

MANAGEMENT ACCOUNTING 4 MAJOR FUNCTIONS OF MANAGEMENT

 provides information to help meet the needs of managers inside an organization for 1. PLANNING - setting goals and developing strategies and tactics to achieve them
better decisions and actions. 2. DIRECTING AND MOTIVATING – organizing; mobilizing people to carry out
 reporting for management / internal users plans and run routine operations; overseeing day-to-day activities
 application of appropriate techniques and concepts in processing economic data to 3. CONTROLLING - determining whether goals are being met and what should be
assist management in establishing plans for reasonable objectives and making rational done if these goals are not met; process of instituting procedures and then obtaining
decisions to achieve these objectives. feedback to ensure that all parts of the organization are functioning effectively
 gathers information according to the purpose for which it is going to be used towards overall company goals
4. PERFORMANCE AND EVALUATION - developing suitable measures of
Financial Accounting Management Accounting performance of managers
Primary Users External users Internal Users
Full Cost COST ACCOUNTING
Unifying
A=L+C Differential Accounting  gives the basis of the cost data to support Financial Accounting and Management
Concept
Responsibility Accounting Accounting
Generally Accepted
Guiding Accounting principles are not strictly  determination of the cost of a particular product or activity
Accounting Principle
Principle followed
(GAAP)
Necessity of STAFF POSITION
Mandatory Made as the need arise  gives support to a line position by giving advisories and analysis.
Report
Type of Nonmonetary (units of product, labor hours,  provision of specialized or professional skills in support of line
Monetary in nature
Information & machine capacity)
Time
Historical and past Past data, Current Figures, & Future data
LINE POSITION
Orientation  occupied by employees who are directly involved in achieving the basic objective of
Emphasis of the organization and who are normally designated to make decisions in achieving
Accuracy and Precision Timeliness and Relevance
Report company goals.
Focus of  principal activities of the organization
Company as a whole Segments, Divisions, branches and centers
Information
Amount of
Compressed and Simplified Extensive and Detailed CONTROLLERSHIP TREASURERSHIP
Details
Not only from accounting system but includes  deals with records, systems and  deals with money, cash and wealth of and
Source of Data Basic Accounting System processes to attain internal control organization.
information that relate to future transactions
Purpose / Preparation of Financial Aid management in its decision making and good management.  it deals with the sources of money,
Objective Statements function  involves holding the primary financing, operating and investing
responsibility for accounting aspects activities and the exercise of prudence in
DECISION-MAKING of management planning and the use of the money of an organization
 process of making a choice from among alternative courses of actions. control.

DECENTRALIZATION CONTROLLER TREASURER

 the delegation of decision making authority throughout an organization by allowing 1. Planning for control 1. Provision for Capital
managers at various operating levels to make key decisions relating to their own area 2. Financial Reporting and 2. Investor Relations
of responsibility Interpretation 3. Short Term Financing
3. Evaluating & Consulting 4. Banking & Custody of Funds
 4. Tax Administration and Management 5. Credit and Collections  ethical standards established by the Institute of Management Accountants for
5. Government Reporting 6. Insurance management accountants to adhere to them
6. Protection of Assets 7. Investments (seeking and availing)  MA shall not commit acts contrary to these standards for shall they condone the
7. Economic Appraisal commission of such acts by others within their organization
CONTROLLER STANDARDS FOR ETHICAL CONDUCT OF MA
 internal finance 1. COMPETENCE - technical knowledge and skills
 responsible for accounting related activities 2. CONFIDENTIALITY - secrecy of information
 normally hold a staff position 3. INTEGRITY - doing the right things; morally sound; ability to carry out duties
 participates in planning, controlling, and decision making ethically
 CHIEF MANAGEMENT ACCOUNTANT of a Company 4. OBJECTIVITY - not being bias; communicate information fairly and objectively
 basic roles of accumulating and reporting of information to all levels of
management Courses of action if the policies do not resolve the ethical conflict or when there are
 directing management attention to problems and assisting in solving problems no policies:
1. Discuss such problems with the immediate supervisor except when it appears that the
TREASURER supervisor is involved.
 external finance 2. Clarify relevant concepts by confidential discussion with an objective advisor
 responsible more on CASH related activities 3. Resign from the organization and to submit an informative memorandum to the
appropriate representative of the organization.
INFORMATION SYSTEM
 network of all methods used in communicating information within an organization IMPACT OF ORGANIZATION STRUCTURE
 set of interrelated subsystems that work together to collect, process, store, transform A. Themes B. Functions in a transaction
and distribute information for planning, controlling and decision making 1. Customer focus theme 1. Authorization
2. Value Chain & Supply Chain Analysis 2. Execution
BASIC INFORMATION SYSTEMS 3. Key Success Factors 3. Recording
1. FINANCIAL Information System - flow of monetary information a) Cost and Efficiency 4. Custodianship
2. PERSONNEL Information System - flow of people working in the organization b)Quality 5. Accountability
3. LOGISTICS Information System - physical flow of goods and services within an c) Time
organization d)Innovations
4. Continuous Improvement &
MANAGEMENT INFORMATION SYSTEMS (MIS) Benchmarking
 set of data gathering, analyzing and reporting functions designed to provide
management with information needed to carry its functions. BENCHMARKING
 organizational procedures, decision processes & cost flow and is for internal use only  process that involves quantitative and qualitative measurement of the difference
 communicating information within an organization between the benchmarking company’s performance of an activity and the
performance by the best in a related industry
COMPONENTS OF MIS
1)Business Forms and Papers 4) Chart of Accounts 7)Financial Reports TOTAL QUALITY MANAGEMENT (TQM)
2)Business Machines 5) Flow Charts 8)Internal Control  approach consisting of organization-wide efforts to identify and solve problems in
3)Journals and Ledgers 6) Organizational Charts continuously improving the ability to deliver quality products and services to its
customers seeks through ongoing refinements in response to continuous feedback
ACCOUNTING INFORMATION SYSTEM
 subsystem of Management Information System and should be based on the size of the JUST-IN-TIME (JIT) INVENTORY SYSTEM
organization and the information needs of the company  maintains minimal or even zero raw materials, goods in process and finished goods
 orderly arrangement of procedures, personnel, records for systematic processing and inventory
reporting of financial information needed by the organization  raw materials are received just in time to be formed into parts, parts are produced just
 processes and procedures by which financial information is received, recorded, in time to be made into finished goods and finished goods are completed just in time
processed, stored and disposed of to be delivered to the customers
 primary objective is to reduce or eliminate inventories
CODE OF PROFESSIONAL ETHICS FOR MA
BACKFLUSH  pictorial presentation of the flow of work and/or documents through a department or
 cost accounting technique used in JIT an entire organization
 delays the costing process until the production of goods is completed
 cost of material & labor are charged at the end of the process when goods are already ORGANIZATIONAL CHART
completed  visual diagram of a firm’s organizational structure that depicts formal lines of
LEARNING CURVE THEORY (ACCOUNTING THEORY OF THE LAW OF reporting, communication and responsibility between managers
DIMINISHING RETURNS)
 productivity rate marginally increases by approximately 20% as the employees gain
experience in work and thus double their output
 trend in TQM focusing on direct labor management

ACTIVITY BASED COSTING (ABC)

 focuses on factory overhead management
 method of allocating indirect factory overhead, indirect selling and administrative
expenses taking in consideration the time spent for each activity
 focuses on various activities performed and collects costs on the basis of the
underlying nature and extent of those activities

BUSINESS PROCESS
 collection of related, structured activities or tasks that produce a specific service or
product

THEORY OF CONSTRAINTS
 the key to success is the effective management of the constraint of the company
 management approach that emphasizes the importance of managing constraints

CONSTRAINT (BOTTLENECK)
 anything that limits or prevents an organization from achieving higher performance
relative to its goal

PROCESS REENGINEERING
 approach to improvement that involves analysis and redesign of workflows within and
between enterprises in order to eliminate unnecessary steps, automate non-value-
added tasks, reduce errors and reduce costs
 elimination of inefficient business processes

COMPUTER INTEGRATED MANUFACTURING (CIM)

 manufacturing approach of using computers to control the entire production process

FEATURES OF COMPUTER INTEGRATED MANUFACTURING (CIM)

1. Electronic Data Interchange (EDI) where sales and purchases are made thru
2. Integration of the Computer Aided Design (CAD) products are designed to tailor to
customer needs and satisfaction through the use of computers
3. Use of Computer Numerically Controlled (CNC) machines and the Coordinating
Measuring Machines (CMM) to simplify production

FLOWCHART
  a capital investment is approved only if there is budget and it meets a minimum rate
of return
(6) Motivating and Measuring Management
 done through performance evaluation on various segments, entity or division of the
company
 related net income and investment costs like inventory and fixed assets are
CHAPTER 2: COST TERMINOLOGY AND CONCEPTS produced directly or indirectly by a cost system

COST ACCOUNTING COST

 measures costs for decision making and financial reporting purposes  value foregone or sacrifice of resources for the purpose of achieving some economic
 2 Basic Processes benefit which will promote the profit making ability of the business
1)Cost Accumulation – gathering / collecting costs by natural classification (ex. DM,
DL) SACRIFICE OR FOREGOING
2)Cost Allocation (Cost Assignment) – tracing and assigning costs to cost objects  current or future decreases in cash or other resources
(ex. product, department)
2 Kinds of Cost
COST ACCOUNTING SYSTEMS (1) Unexpired Cost – prepaid; asset
1)JOB ORDER COSTING (2) Expired Cost
 provides limited quantities of products or services unique to a customer’s need (ex.  Expense – benefit is received
automobile repair shop)  Loss – no benefit is received
2)PROCESS COSTING CLASSIFICATION OF COSTS
 produce many units of a single or nearly identical product (mass production) (ex. A. Tendency to Vary with Volume of Activity (Behavior / Variability)
manufacturer of toys) (1) Variable Costs - TVC vary directly with the level of production because they are
3)STANDARD COSTING constant per unit
 uses predetermined factors (quantity and price) to determine the standard cost of (2) Fixed Costs - FC remain fixed in total over relevant range for a specific period of
materials, labor, and overhead, to be assigned to inventory and cost of goods sold time; vary per unit
 can be used simultaneously with job order and process costing a) Committed FC – costs which cannot be eliminated without affecting the
4)BACKFLUSH COSTING profitability or long-term goals of the firm
 streamlined cost accounting method that simplifies, speeds up and reduces b)Discretionary FC – costs that the management decides to incur in the current
accounting effort / procedures in accumulating product costs period and may be changed periodically depending on what the circumstances
 eliminates the detailed tracking of cost of Work-in-Process done in traditional demand
costing (3) Mixed Costs - increases as volume increases but not in direct proportion to the
5)ACTIVITY BASED COSTING activity level; costs that contains both fixed and variable costs elements
 uses multiple drivers to predict and allocate costs to goods or services B. Natural Classification
(1) Manufacturing (Product) Cost - costs used in production (DM, DL, FOH)
USES OF COST ACCOUNTING SYSTEMS (2) Commercial (Operating) Expense
(1) Product Cost Determination a. Marketing (Selling) Expense - distribution expense; incurred in making sales
 important for making pricing decisions on the product and delivery of products sold
(2) Inventory Valuation b. Administrative (General) Expense - incurred in direction, control an
 DM, WIP, FG administration of business
(3) Cost Management and Control C. Applicability to the Accounting Period
 analysis of actual and standard costs (performance evaluation: variance analysis) (1) Capital Expenditure - benefit the current as well as the future periods and are
analysis of cost behavior classified as assets
(4) Short Term and Long Term Planning (2) Revenue Expenditure - benefit only the current period and is classified as an
 projecting the future costs and expenses levels based on the existing costs and expense
expense levels of every department, product or activity D. Cost for Planning and Control
(5) Justifying Capital Expenditures
 (1) Budgeted Costs - predetermined costs that may be incurred in undertaking a plan  Cost of Conformance to Quality Standard
or activity; Variance = Actual - Budgeted (1) Prevention Cost - incurred to avoid defects, which are units that do not meet
(2) Standard Costs - predetermined costs established by management to be used in the specification (ex. Preventive maintenance)
preparing budgets for comparison with actual costs (2) Appraisal Cost - incurred to monitor and find defective units before they leave
E. Relation to the Product (Prime Costs = DM + DL; Conversion Costs = DL + the plant (ex. Inspection costs for materials)
FOH)  Cost of Non-conformance to Quality Standard
(1) Direct Materials - materials that become part of the finished product and which (3) Internal Failure Cost - incurred when a unit is found to be defective before it
can be feasibly and cost effectively traced to the product on a per unit basis leaves the plant (ex. Cost to repair or rework defective units)
(2) Direct Labor - work that is performed directly on the product and which can be (4) External Failure Cost - incurred when customers find defective units (ex.
cost effectively traced and attached to the product on a per unit basis Cost to repair or replace returned units)
(3) Overhead - all costs other than DL and DM that are part of making the product Traditional Manufacturing Inventories (Inventory Valuations)
but which are not directly traceable to a specific product (1) Raw Materials Inventory – anything tangible that becomes part of the product or its
a. Indirect Materials - materials that are used in the manufacturing process packaging
which either do not become part of the product or do become part of the (2) Work-in-Process Inventory – costs are accumulated until the product is finished
product but which are not cost effectively traceable to the product and transferred to the finished goods inventory
b. Indirect Labor - factory labor that cannot be cost effectively traced to the (3) Finished Goods Inventory – balance of finished product on hand ready to be sold
product
F. Relation to the Department (Traceability) Raw Materials, beginning xx
(1) Direct Costs - costs that are identifiable with the department; costs that a Purchases xx
particular department solely incurs Ram Materials Available for
xx
(2) Indirect Costs - costs that cannot be easily identified with a department because Use
this type of cost is not solely incurred by a particular department Raw Materials, ending (xx)
G. Cost for Analytical Processes Direct Materials Used xx
(1) Relevant Costs - incremental or marginal costs Direct Labor xx
(2) Irrelevant Costs - exist no matter which alternative is selected are irrelevant to the Factory Overhead xx
decision making (ex. Sunk cost) Manufacturing Costs xx
H. Cost for Decision Making (Relevant / Irrelevant) Work-in-Process, beginning xx
(1) Differential Cost - indifference between two alternatives Goods Place into Process xx
a. Incremental - increased cost Work-in-Process, ending (xx)
b. Decremental - decreased cost Cost of Goods Manufactured xx
(2) Avoidable Cost - escapable costs; cost that can be eliminated by virtue of an Finished Goods, beginning xx
alternative; cost savings arising from a decision to discontinue an undertaking Total Goods Available for Sale xx
(3) Out of Pocket Cost - future outlay of financial resources as a consequence of a Finished Goods, ending (xx)
decision Cost of Goods Sold xx
(4) Imputed Cost - cost that does not involve actual outlay of cash but is considered
as a relevant cost for decision making; hypothetical cost representing the usage of PERIODIC INVENTORY SYSTEM
a particular resource (ex. Interest expense)  adjusts the inventory accounts at the end of a period using data determined from a
(5) Opportunity Cost - benefits sacrificed y selecting one alternative over another physical count of inventory items on hand
where the alternatives are mutually exclusive; revenue or profit associated with the
next best alternative; not transactional and do not represent each cash received or PERPETUAL INVENTORY SYSTEM
paid; used for decision-making purposes only  inventory accounts are DIRECTLY adjusted for each acquisition of materials,
(6) Sunk Cost - cost that is already incurred and is therefore irrelevant for decision requisition of materials, and transfer of the cost of an item sold from Finished Goods
making Inventory to Cost of Goods Sold as these events actually occur
I. Degree of Controllability (Managerial Influence)
(1) Controllable Cost - level has the power to authorize the cost COST BEHAVIOR PATTERNS
(2) Non-controllable Cost - management does not have the power to authorize the
COST TOTAL AMOUNT COST PER UNIT
expenditure
FIXED CONSTANT Decrease CPU = Increase QTY
J. Quality Costs
 Increase TA = Increase  always follow the activity level
VARIABLE CONSTANT
QTY
Increase TA = Increase Cost @ High Level−Cost @ Low Level
MIXED
QTY
Decrease CPU = Increase QTY VCU =
High Activity−Low Activity
COST BEHAVIOR ASSUMPTIONS
1)Relevant Range - range of activity within which the behavior of variable and fixed
costs are valid
FC=HighCost −(VCU x High Activity )
2)Time Assumption - cost behavior patterns are true only over a specific period of time,
usually in the short run only FC=LowCost −(VCU x Low Activity)
3)Linearity Assumption - cost is assumed to follow a linear relationship over the
relevant range despite its tendency to show otherwise in the long run.

COST ANALYSIS
 understanding the cost behavior under varying conditions (2) LEAST SQUARES METHOD
 key in effectively predicting future costs and essential in planning and controlling a  Simple Regression Analysis
firm’s activity  determines the fixed and variable components by solving 2 simultaneous linear
equations which are based on the condition that the sum of the deviations above
PLANNING the regression line equals the sum of deviations below the regression line
 management make decisions partly based on expectations as to the future  Point of Line: Y = a + bX == TC = FC + VCU(x)

CONTROLLING EQ 1. ∑ Y =Na+ b ∑ X
 process of using feedback information for comparison with expectations and
implementing any necessary corrective actions EQ 2. ∑ XY =∑ Xa+ b ∑ X 2
COST FUNCTION
 mathematical expression of how cost changes with activity level EQ 3. EQ 1 – EQ 2
 activity levels explains the total costs and that the relationship is linear within the
relevant range ALTERNATIVE:
 Point of Line: Y = a + bX
b=n ¿ ¿
COMPARISON OF COSTING METHODS
INPUT ACTUAL NORMAL STANDARD
actual
actual
a=( ∑ Y ) −(b)¿ ¿
Direct Materials (AQ x std. input per unit output WHERE:
(AQ x AC)
AC) Y = TOTAL COST
actual a = FIXED COST
actual
Direct Labor (AH x std. input per unit output b = VARIABLE COST PER UNIT
(AH x AR)
AR) x = ACTIVITY LEVEL
Factory actual input @ budgeted std. input @ budgeted n = # of sample
actual
Overhead rate rate
(3) MULTIPLE REGRESSION ANALYSIS
METHODS OF COST SEGREGATION  used when the dependent variable costs is caused by more than one independent
(1) HIGH – LOW POINT METHOD variable (activity measure)
 simple and widely used method which considers the highest and lowest activity
levels of the relevant range (4) VISUAL FIT METHOD
 NOT ACCURATE and is considered INFERIOR to other statistical techniques  SCATTERGRAPH Method
  derives fixed and variable elements of a mixed cost thru visual inspection  Standard error of the estimate
 graph that plots all activity level and costs, and separates the fixed and variable  measures the accuracy of predictions (forecast) using the regression line
components thru the “line of regression”  estimate of the discrepancy that may happen between the actual and projected costs to
 the line of conditional expected values and where the sum of distance be incurred
(deviations) above and below it are approximately the same  serves as a confidence interval or acceptable range of tolerance, for use in exercising
control over the costs
(5) INDUSTRIAL ENGINEERING (WORK MEASUREMENT) METHOD  the lesser the standard error of estimate, the greater the degree of confidence
 analyzes the relationship between inputs and outputs in physical form

(6) CONFERENCE METHOD

 analyzes the costs based on opinions by the various departments of the firm

(7) ACCOUNT ANALYSIS METHOD

 analyzes each account based on experience and judgment of accounting and other
qualified personnel of the firm

CORRELATION ANALYSIS
CORRELATION
 measures the co-variation between dependent (y) and independent (x) variables

COEFFICIENT OF CORRELATION (r)

 measures the extent of linear relationship between y and x

RANGE OF CORRELATION
1)No Correlation (r = 0)
 no line can be drawn to show the relationship of y and x
2)Perfect Correlation (r =±1)
a)Positive (Direct) Relationship (r = +1)
 value of dependent variable (y) increases as the value of independent
variable (x) increases
 regression of line slopes upward to the right
b)Negative (Inverse / Indirect Relationship (r = -1)
 value of y decreases as the value of x increases
 regression of line slopes downward to the the right

RULE OF THUMB:
r > 0.5 = high correlation
r < 0.5 = low correlation
 Low correlation means the data at hand shows no direct correlation between the cost
(y) and cost driver (x), therefore, data cannot be used as a basis for projecting future
costs

COEFFICIENT OF DETERMINATION (r2)

 represents the percentage of total variation in y that is accounted for by line of
regression

STANDARD DEVIATION
 CONTRIBUTION MARGIN
 Marginal Income / Marginal Profit
 amount available to recover fixed costs and then provide profits
 CM > FC = PROFIT; CM < FC = LOSS
 for managerial purposes only

MARGINAL INCOME STATEMENT

Sales xx S SPU Sales
Variable Costs (xx (VC) (VCU) (VC – COGS)
)
Contribution Margin xx CM CMU (VC – S&A)
Fixed Costs (xx (FC) ÷ SPU CM
CHAPTER 3. COST VOLUME PROFIT (CVP) ANALYSIS )
Profit (Loss) – EBIT xx EBIT CMR (FC – COGS)
COST VOLUME PROFIT (CVP) ANALYSIS (FC – S&A)
 based on certain limiting assumptions which do not necessarily negate its usefulness Net Income
for planning and control of operations BREAK-EVEN POINT (BEP)
 systematic examination of the relationships among costs, cost drivers (activity or  provides the minimum level of sales that the company should earn in order to avoid
volume level) and profit losses
 used to measure the functional relationship between the major factors affecting profit  level of sales where the company’s PROFIT = ZERO
and to determine the profit structure of an entity
 used for planning and decision making 1. Equation Method 2. Contribution Margin Method
 Revenue – Cost = Profit  S – VC = FC
ELEMENTS OF CVP ANALYSIS  S = VC + FC  (SPU – VCU)(x) = FC
1. Sales Price  SPU(x) = (VCU)(x) + FC  (CMU)(x) = FC
2. Total Fixed Costs
3. Variable Cost per Unit FC FC
4. Activity Level (Sales Volume) BEP ( Q )= BEP ( P )=
5. Sales Mix (Multiple Products) CMU CMR

ASSUMPTIONS IN CVP ANALYSIS FINANCIAL BEP

1)Cost Classification 4)Cost and Revenue  EBIT must be equal to the finance cost (interest)
 all costs are classified as either fixed or variable Function
only, with unit level activity cost drivers  relationship is predictable FC +interest FC+interest
BEP ( Q )= BEP ( P )=
 mixed costs are deemed to have been separated and linear over a relevant CMU CMR
into fixed and variable components using the range of activity and a
appropriate cost segregation technique specified period of time PROFIT PLANNING
2)Inventory Levels 5)SPU and Market  process of determining the level of sales required in order to earn the desired level of
 no significant change in inventory level Condition profit
 production = sales  remains unchanged MANAGEMENT REQUIRED SALES (Q) REQUIRED SALES
3)Sales Mix 6)Technology & Production GOAL (P)
 sales mix is constant Efficiency
 relative portion of unit or peso sales derived from  constant FC + DP FC + DP
1.) DP BEFORE TAX ¿ ¿
each product or service 7)Time Value of Money CMU CMR
 ignored
 DP DP
FC + FC + Total FC P 1,157,000.00 P 1,157,000.00
2.) DP AFTER TAX (1−tax %) (1−tax %) ÷ Weighted Ave. (CMU;
¿ ¿ 44.50 32.96%
CMU CMR CMR)
Total BEP (Q ; P) 26,000 P 3,510,000.00
3.) DP RATION (Profit FC + DP FC + DP
¿ ¿
as % of Sales) CMU−Profit per Unit CMR−Profit Ratio Total BEP (Q) per BEP (P) per
Product x SMR x SPU =
BEP (Q) product product
A 26,000 40% 10,400 P120 P 1,248,000
MARGIN OF SAFETY B 26,000 30% 7,800 200 1,560,000
 excess of budgeted sales over the break-even sales C 26,000 30% 7,800 90 702,000
 amount by which sales can decrease before losses are incurred TOTA
26,000 P 3,510,000
 higher MOS = lower risk of Loss L

Sales xx ALTERNATIVE 2.
Sales Ratio MOS (Q/S) MOSR A B C TOTAL
(Budgeted)
SPU P 120.00 P 200.00 P 90.00
BEP (xx x CMU / (VCU) (80.00) (150.00) (45.00)
(BEP Ratio) x CMR
) CMR CMU P 40.00 P 50.00 P 45.00
MOS xx MOS Ratio Desired Profit Profit Ratio x SM UNITS x 4 x 3 x 3
x Budgeted Sales COMPOSITE CMU P 160.00 P 150.00 P 135.00 P 445.00
Desired Profit
BEP for MULTIPLE PRODUCTS Total FC P 1,157,000.00
 Sales Mix – relative proportion in which the company’s product are sold ÷ COMPOSITE CMU 445
 Sales Mix Ratio – sales units of individual product / total sales units of all products COMPOSITE BEP (units) 2,600

EXAMPLE: COMPOSITE BEP (Q) per BEP (P) per

Product x SM x SPU =
FC = P 1,157,000 BEP (Q) product product
Produc SPU VCU Sales Mix A 2,600 4 10,400 P120 P 1,248,000
t B 2,600 3 7,800 200 1,560,000
A 120 80 4 C 2,600 3 7,800 90 702,000
B 200 150 3 TOTA
26,000 P 3,510,000
C 90 45 3 L

ALTERNATIVE 1. SENSITIVITY ANALYSIS

A B C TOTAL  process of determining the change in profit caused by changes in any of the profit
SPU P factors
P 120.00 P 90.00
200.00 INDIVIDUAL
(VCU) (80.00) (150.00) (45.00) CMU / CMR BEP PROFIT MOS
CHANGES
CMU P 40.00 P 50.00 P 45.00
x SMR x 40% x 30% x 30% 1. Increase in SPU INC DEC INC INC
Weighted Ave. CMU P 16.00 P 15.00 P 13.50 P 44.50 2. Increase in VCU DEC INC DEC DEC
3. Increase in TFC NE INC DEC DEC
SPU P
P 120.00 P 90.00
200.00 COMBINATION BEP BEP PROFI MOS MOS
x SMR x 40% x 30% x 30% CMU CMR
CHANGES (Q) (P) T (Q) (P)
Weighted Ave. SPU P 48.00 P 60.00 P27.00 135.00 4. Increase in SPU =
NE DEC NE INC NE NE INC
Increase in VCU
Weighted Ave. CMU P 44.50 5. % Increase in SPU = %
INC NE DEC NE INC INC INC
÷ Weighted Ave. 135.00 Increase in VCU
SPU
Weighted Ave. CMR 32.96 % COST STRUCTURE
 relative proportion of fixed and variable costs in a firm Operating Costs Absorption Costing Variable Costing
Direct Materials
OPERATING LEVERAGE Product Cost Product Cost
Direct Labor
 extent to which an organization uses fixed costs in its cost structure Product Cost Product Cost
Variable Factory Overhead
 measures the sensitivity of net operating income (EBIT) to a given percentage in sales Product Cost Product Cost
FIXED FACTORY
 multiplier to determine the change in operating income whenever a company intends to PRODUCT COST PERIOD COST
OVERHEAD
increase its sales Period Cost Period Cost
Variable S&A Expenses
 Increase in CM = Increase in DOL Period Cost Period Cost
Fixed S&A Expenses
 Increase in FC = Increase in DOL = Increase in Sales = Increase in Profit
 Increase in FC = Increase in DOL = Decrease in Sales = Increase in Loss AS TO NET INCOME
ACTIVITY LEVELS NET INCOME
CM % ∆∈Profit ( EBIT ) Production = Sales AC = VC
 DOL= D OL= Production > Sales AC > VC
EBIT % ∆∈Sales Production < Sales AC < VC
% ∆ in Sales xx % RECONCILIATION OF NET INCOME UNDER ABSORPTION COSTING AND
x DOL xx VARIABLE COSTING
% ∆ in Profit xx% Net Income - Absorption Costing xx
x Profit xx Fixed Factory Overhead in Beginning
xx
Increase (Decrease) in Inventory
xx
Profit Total xx
Fixed Factory Overhead in Ending Inventory (xx)
INDIFFERENCE POINT Net Income - Variable Costing xx
 activity level at which two alternatives being analyzed would yield the same total costs
or profits VARIABLE COSTING INCOME STATEMENT
Sales xx
1.) TOTAL COST APPROACH 2.) PROFIT APPROACH Variable Cost of Goods Sold - ACTUAL
 TC = FC + VCU (x)  PROFIT = CMU (x) – FC Variable Cost of Goods Sold - STANDARD xx
 A = B; TC = TC  A = B; PROFIT = PROFIT Variances
Unfavorable xx
INDIFFERENCE POINT Favorable (xx) xx (xx)
xx
(Q) Manufacturing Margin xx
x SPU xx Variable S&A Expenses (xx)
INDIFFERENCE POINT (P) xx Contribution Margin xx
Fixed Costs
Factory Overhead – ACTUAL xx
CHAPTER 4. VARIABLE COSTING, ABSORPTION COSTING, THROUGHPUT S&A Expenses xx (xx)
COSTING, AND ACTIVITY BASED COSTING
Operating Income xx
ABSORPTION COSTING VARIABLE COSTING ABSORPTION COSTING INCOME STATEMENT
 Full Cost / Traditional / Direct Costing / Marginal Costing / Internal Sale xx
Conventional / Normal Costing / Reporting Cost of Goods Sold - ACTUAL
External Reporting method of recording and reporting costs Cost of Goods Sold - STANDARD xx
 includes all manufacturing costs which regards only the variable Variances
as product costs manufacturing costs as product costs Unfavorable xx
 Gross Margin Contribution Margin Favorable (xx)
Volume Variance – UF
xx / (xx) xx (xx)
TREATMENT OF OPERATING COSTS (F)
 Gross Income xx Direct Labor 15
Operating Expenses (xx) Variable Factory Overhead 12
Operating Income xx Fixed Factory Overhead P 60,000
Variable Selling &
5
Administrative
ADVANTAGES OF VARIABLE COSTING Fixed Selling & Administrative 30,000
1. VC reports are simpler and more understandable. Fixed factory overhead costs per month are based on the normal capacity of 10,000 units.
2. Data needed for BEP and CVP Analysis are readily available. The product sells at P 75 per unit.
3. VC is more compatible with Standard Cost Accounting System
4. Problems involved in allocating fixed costs are eliminated. REQUIREMENT:
5. VC provides useful information for decisions like pricing, elimination of a 1. Unit product cost under absorption costing and variable costing
product line, and other decision making problems encountered by management. 2. Cost of the ending inventory for February under absorption costing and variable
6. Profit for the period is not affected by changes in inventories. Other things costing
remaining constant like price, costs and sales mix; profit moves in the same 3. Income Statement for each month using absorption costing and variable costing
direction as sales. 4. Reconcile the net income under absorption costing and variable costing.
7. VC Net Operating Income is closer to net cash flow than AC NI. This is
important for companies having cash flow problems. R1. AC VC R2. AC VC
8. Impact of fixed costs on profits is emphasized under VC. Total fixed cost is DM P 20 P Inventory, end 3,000 3,000
clearly shown in the income statement. Under AC, the fixed costs are mingled 20 (Q)
with variable costs and are buried in cost of goods sold and ending inventories. DL 15 15 Unit Product Cost x 53 x 47
9. VC data make it easier to estimate the profitability of products, customers, and Variable OH 12 12 Inventory, end (P) P P 141,000
segment of the business. 159,000
Fixed OH 6
Unit Product P 53 P
DISADVANTAGES OF VARIABLE COSTING Cost 47
1. Separation of costs into fixed and variable might be difficult, especially with
mixed costs. R3. ABSORPTION JANUARY FEBRUARY MARCH
2. Management decisions, like product pricing, may require the knowledge of the Sales (75 P 750,000 P525,00 P825,000
total product cost, including fixed factory overhead. Hence, there will be a need )
for additional computations to determine the total cost of the product. Cost of Sales (53 (530,000) (371,000) (583,000)
3. The principle of matching costs with revenues is violated because of the )
exclusion of fixed overhead in the computation of product cost. Operating Expenses
4. The cost of inventory is understated because of the exclusion of fixed overhead Variable (50,000) (35,000) (50,000)
from product cost. This results to a decrease in working capital, current ratio and Fixed (5) (30,000) (30,000) (30,000)
quick ratio, weakening the financial position of the company. Operating Income P 140,000 P 89,000 P 157,000

R3. VARIABLE JANUARY FEBRUARY MARCH

Sales (75
P 750,000 P 525,000 P 825,000
)
EXAMPLE: VC – COS (47
Activity Level – Januar Februar March (470,000) (329,000) (517,000)
)
units y y Manufacturing
Production 10,000 10,000 10,000 P 280,000 P 196,000 P 308,000
Margin
Sales 10,000 7,000 11,000 VC – OPEX (5) (50,000) (35,000) (55,000)
Costs incurred in the different areas of operation were as follows: Contribution Margin P 230,000 P 161,000 P253,000
Per Unit Per Month Fixed Costs
Direct Materials P 20 FOH (60,000) (60,000) (60,000)
 OPEX (30,000) (30,000) (30,000) Estimated Overhead Costs(step 2)
Operating Income P 140,000 P 71,000 P 163,000 Predetermined Overhead Rate=
Estimated Leve f Cost Driver Activity ( step3)
5. Allocate overhead costs to products
R4. FEBRUAR
JANUARY MARCH
Y
COST DRIVER
Net Income – Absorption
P140,000 P89,000 P157,000  action that causes (drives) the costs associated with the activity
Costing
ACTIVITIES
Fixed OH Inventory, beg (6/u) -0- -0- (18,000)
a. Unit-level activities – performed each time a unit is produced; costs is proportional to
Fixed OH Inventory, end (6/u) -0- (18,000) (12,000)
the number of units produced
Net Income – Variable Costing P 140,000 P 71,000 P 163,000
b. Batch-level activities – performed each time a batch is handled or processed
THEORY OF CONSTRAINTS regardless of how many units are in the batch; costs depends on the number of batches
 focuses on managing the constraints in a company to maximize profits processed rather than the number of units produced or sold
 emphasized continuous improvement to maintain competitiveness
c. Product-level activities – specific products and typically must be carried out
THROUGHPUT COSTING
regardless of how many batches are run or how many units are produced
 extreme form of variable costing
 treats all costs except used materials as period costs
d. Customer-level activities – specific customers and include activities such as sales
 objective is to minimize the cost of the ending inventories
calls, catalogue mailing and technical supports not tied to any specific product
 considers direct materials as the only pure variable costs and therefore the only costs
of inventory that is charged to COGS
e. Organization-sustaining activities (Plant Wide Activities) – carried out regardless of
 VC = DM only
which customers are served, units produced, number of batches run
BASIC METHODS OF ALLOCATING OVERHEAD COSTS
(1) PLANTWIDE ALLOCATION ACTIVITY ANALYSIS
 makes use of one predetermined overhead to allocate overhead costs  process of studying activities in order to devise ways of minimizing or eliminating
Estimated Overhead Costs non-value added activities
Predetermined Overhead Rate=
 machine hrs
Total DLH (
DL cost ) ACTIVITY
 any process or procedure that consumes overhead resources
 event, action, transaction, task or unit of work with a specified purpose
(2) DEPARTMENT ALLOCATION
 cost pools are formed for each department rather than the entire plant CLASSICATION OF ACTIVITY ACCORDING TO VALUE OF PRODUCT
(1) VALUE ADDING ACTIVTIES
(3) ACTIVITY BASED COSTING (ABC)  activities that are necessary to produce a product
 seeks to estimate the cost of products by estimating the costs of many activities and in
turn using those estimates to estimate the cost of products by reference to how much (2) NON-VALUE ADDING ACTIVITIES
of the activity each product uses  activities that do not make the product more valuable to the customer
 resource consumption  activities which can be eliminated without deterioration of product quality,
 provides a way to trace resources consumption to products and other segments performance or perceived value
 costing system that uses several cost pools, organized by activity, to allocate  necessary activity like moving materials from and to stockroom or workstation
overhead costs and inspecting the quality of finished product; subject to continuous evaluation
and improvement
STEPS IN ACTIVITY BASED COSTING (ABC)  unnecessary activity like wait or queue time, which needs to be reduced, if not
1. Identify costly activities (activity cost pools) required to complete products eliminated
2. Assign overhead costs to activities identified in step 1
3. Identify the cost driver (activity measure) for each activity BUSINESS VALUE ADDED ACTIVITY
4. Calculate a predetermined overhead rate for each activity
 activity that is necessary for the operation of a firm but for which a customer not want the plant (ex. Cost to repair or rework defective units; cost of scrap, spoilage,
to pay rework costs, disposal of defective products)
(4) External Failure Cost – defective product is delivered to a customer; incurred
PROCESS MAP when customers find defective units (ex. Cost to repair or replace returned units;
 detailed flowchart that indicates every step that goes into making a product or product liability lawsuits; warranty claims; recall costs)
providing a service
PROCESS COSTING
 technique used in accumulating, processing and reporting production costs of
VALUE CHART homogenous products produced in the same process and production run
 visual representation that identifies the stages and the time spent in those stages from CHAPTER 5. STANDARD COSTING
the beginning to the end of a process

THROUHPUT TIME / MANUFACTURING CYCLE

 amount of time to completely manufacture a product
 (a) PROCESS TIME – amount of time work is actually done in the product; value
adding
 (b) MOVE TIME – amount of time spent in moving raw materials or WIP from one
work station to another; non-value adding
 (c) QUEUE TIME – amount of time spent before a product is worked on, moved,
inspected, or shipped; non-value adding
 (d) INSPECTION TIME – amount of time spent in ensuring the quality of the
product; non-value adding

ACTIVITY BASED MANAGEMENT (ABM)

 to maximize the value of product delivered to customers, the firm must strive to
eliminate, or at least minimize non-value adding activities and perform value adding
activities more efficiently

STEPS IN ELIMINATING NON-VALUE ADDING COST USING ABM

(1) Identify activities and then the non-value added activities
(2) Understand the activity linkages, root causes and triggers
(3) Establish performance measures and report non-value added costs

Quality Costs
 Cost of Conformance to Quality Standard – incurred to keep defective products
from falling into the hands of the customers
(1) Prevention Cost – any activity that reduces the number of defects in goods and
services; incurred to avoid defects, which are units that do not meet the
specification (ex. Preventive maintenance, Quality engineering)
(2) Appraisal Cost – activities related to inspection to make sure that the goods and
services meet quality standards; to incurred to monitor and find defective units
before they leave the plant (ex. Inspection costs for materials, Product quality
standards, inspection/testing of incoming materials)
 Cost of Non-conformance to Quality Standard – incurred because defects are
produced despite efforts to prevent it
(3) Internal Failure Cost – identification or discovery of defects during the appraisal
or inspection process; incurred when a unit is found to be defective before it leaves
CHAPTER 6. GROSS PROFIT VARIANCE ANALYSIS

BASIC FACTORS AFFECTING GROSS PROFIT

1. Change in Sales Price
2. Change in Product Cost
3. Change in Sales Volume

SINGLE PRODUCT: 6-way Analysis

 used only when details are given as to the unit selling price, unit cost and sales volume
 analyzes the gross profit by showing the change in sales and the change in the cost of
sales

Change in Sales Change in Cost of Sales

(a) Quantity or Volume Factor (a) Quantity or Volume Factor

 change in volume assuming there  change in volume assuming there is
is no change in selling price no change in unit product cost

(b)Price Factor (b) Cost Factor

 change in selling price assuming  change in unit product cost assuming
there is no change in sales volume there is no change in sales volume

(c) Quantity – Price Factor (c) Quantity – Cost Factor

 change in sales brought about by  change in cost of sales brought about
the combined effect of both the by the combined effect of both the
change in sales volume and the change in sales volume and the
change in unit selling price change in unit cost

6-way Analysis
Change in Sales is due to:
Quantity Factor
∆ in Quantity Sold x Selling Price Last xx
Year
Price Factor ∆ in Price x Sales Volume Last Year xx
Quantity – Price Factor ∆ in Sales Volume x ∆ in Selling Price xx
Net Increase in Sales xx
Change in COS is due to:
 Quantity Factor ∆ in Quantity Sold x Unit Cost Last Year xx x Gross Profit Rate LY x %
Cost Factor ∆ in Unit Cost x Sales Volume Last Year xx xx
Quantity – Cost Factor ∆ in Sales Volume x ∆ in Unit Cost xx Price Factor – F (UF) Sales TY xx
Less: Sales TY @ LY SP (xx)
Net Increase in COS (xx)
xx
Net Increase in Gross
xx Cost Factor – F (UF) COS TY xx
Profit
Less: COS TY @ LY Unit Cost (xx)
(xx)
Net Increase in Gross
xx
Profit

SINGLE PRODUCT: 4-way Analysis

 measures the relative changes in sales volume, unit cost and sales price
 used when data is either complete or incomplete

4-way Analysis
Change in Sales is due to:
Quantity Factor – F (UF) Sales TY @ LY SP xx MULTIPLE PRODUCTS: 4-way Analysis
(xx
Less: Sales LY xx EXAMPLE:
)
Gross Profit Variance for Multiple Products
Price Factor – F (UF) Sales TY xx
(xx
Less: Sales TY @ LY SP xx PRODUCTS UNITS SPU
CP
GPU SALES COS GP
) U
Net Increase in Sales xx A 400 90 60 30 P 36,000 P 24,000 P 12,000
Change in COS is due to: B 700 40 30 10 28,000 21,000 7,000
201
Quantity Factor – F (UF) COS TY @ LY Unit Cost xx C 600 70 35 35 42,000 21,000 21,000
3
(xx TOTAL 1,700
P
P 66,000 P 40,000
Less: COS LY xx 106,000
)
Cost Factor – F (UF) COS TY xx
(xx A 500 80 50 30 P 40,000 P 25,000 P 15,000
Less: COS TY @ LY Unit Cost xx B 1,000 50 25 25 50,000 25,000 25,000
) 201
C 800 60 40 20 48,000 32,000 16,000
Net Increase in COS (xx) 4
P
Net Increase in Gross TOTAL 2,300 P82,000 P56,000
xx 138,000
Profit ( P16,000
CHANGE (600) (P32,000) (P16,000)
)

SOLUTION:
SINGLE PRODUCT: 3-way Analysis GP 40,000
 used as an alternative solution to the 4-way Analysis 2013 Average GP per unit= = =P 23.53
units 1,700
GP 56 , 000
201 4 Average GP per unit= = =P 24.35
3-way Analysis units 2,3 00
Quantity Factor Sales TY @ LY SP xx
Less: Sales LY (xx) Price Factor Sales TY P138,000
Increase in Sales xx F (UF) Less: Sales TY @ LY SP
 A (500 units x P 90) P
45,000
B (1,000 units x P 40) 40,000
C (800 units x P 70) (P
56,000 (141,000)
3,000)
COS TY P 82,000
Less: COS TY @ LY CPU
Less: Cost Factor A (500 units x P 60) P
F (UF) 30,000
B (1,000 units x P 30) 30,000
C (800 units x P 35) 28,000 (88,000) 6,000
Units Sold TY 2,300
Quantity Factor Less: Units Sold LY (1,700)
F (UF) Increase in Quantity Sold 600
x Ave. GP per unit LY x P23.53 14,117
Ave. GP/unit TY @ LY
P 23.04
GPU
Sales Mix Factor
Less: Ave. GP/unit LY (23.53)
F (UF)
Difference (0.48)
x Units Sold TY x 2,300 (1,117)
Net Increase in
P 16,000
GP

ALTERNATIVE SOLUTION FOR QUANTITY FACTOR:

Units sold TY @ LY Ave. GPU (2,300 units x CHAPTER 7. OPERATIONAL BUDGETING
P 54,118
P23.53)
Less: GP LY (40,000) BUDGET
 detailed plan for acquiring and using financial and other resources over a specified time
F (UF) Variance 1, 118
period
 represents the firm’s plans for the future expressed in quantitative terms
 road map that guides the managers along the way and a chart of the firm’s course of
ALTERNATIVE SOLUTION FOR SALES MIX FACTOR: operation
GP TY @ LY GPU (P141,000 – P88,0000) P 53,000
Units sold TY @ LY Ave. GPU (2,300 units x
(54,118) BUDGETING
P23.53)
 act of preparing a budget
F (UF) Variance (P1,118)  motivates managers to anticipate opportunities, problems and actions rather than to
merely react
 helps the firm in defining broad objectives and goals and formulating strategies to
achieve such objectives
 enables the firm to allocate its resources to where they can be used most effectively

BUDGETARY CONTROL
 use of budget to control a firm’s activities

PLANNING PROCESS
 brings together ideas, forecasts, resource availability and financial realities to create a
course of action to achieve in the firm’s goals and objectives

GOAL CONGRUENCE
 a firm’s striving to achieve a common set of objectives

BUDGET SYSTEM
 serves as a fiscal disciplinarian and helps ensure that managers understand their
authority, responsibility and limitations

PURPOSE OF BUDGET
1. Formalize the planning process
2. Create a Plan of Action
3. Coordinate and integrate management’s efforts
4. Aid in resource allocation
5. Motivate managers
6. Create a Basis for Performance Evaluation
7. Promote continuous improvement
8. Create an aura of control

CHAPTER 8. RELEVANT COSTING (SHORT-TERM NON-ROUTINE

DECISIONS)
CHAPTER 9. RESPONSIBILITY ACCOUNTING AND DECENTRALIZED
OPERATIONS

CENTRALIZATION
 process where the concentration of decision making is in one or on a few hands
 all the important decisions and actions at the lower level are subject to the
approval of the president or the top management
CHAPTER 10. QUANTITATIVE TECHNIQUES

CHAPTER 11. TIME VALUE OF MONEY, AND USING IT TO VALUE BONDS

AND STOCKS

CHAPTER 12. COST OF CAPITAL AND OPTIMAL CAPITAL STRUCTURE

CHAPTER 13. CAPITAL BUDGETING

CHAPTER 14. BUSINESS PLANNING

CHAPTER 15. ENVIRONMENTAL MANAGEMENT ACCOUNTING (EMA)