LESSON 3 Diff and the Organization ont Branches of Accounting, LEARNING OUTCOME At the end of this lesson, you should be able to discuss how the practice of vanous branches of accounting fits into an organization LESSON OBJECTIVES Differentiate the branches of accounting + Define the role of management accountant in a corporate structure DISCUSSION Financial, Cost, and Managerial Accounting Accounting, as a science, has different branches. However, it is to be emphasized that the main objective is still to provide financial information; it is just that the nature and focus of the financial information will change depending on the branch of accounting. Nowadays, accounting information system and accounting research are considered as branches. The discussion will be focused on the three main branches, namely, Financial Accounting, Cost Accounting, and Management ‘Accounting. The following diagram shows how the three branches are related Figure 2. Relationship of Financial, Cost, and Management Accounting Financial Cost Management Accounting Accounting Accounting 13rence between the three branches oy The table below summarizes the diffe secourny ment Accounting ong Management AGO Table 1.3. Comparison of Financial, Cost, and a ——— Recounting __ Managerial Accounting Internal us Users (Management Team Creditors, Government Membors: CEO, Co, agencies, Customers, Marketing Managers, Suppliers, etc.) Production, ate mputation Special reports to be Output Financial statements Cost comp! used for plannin monitoring, and controlling 5 ee ‘Specific purpose Purpose General purpose Various pUrpe! : AAP Gan be GAAP or specific Users’ Requirement ne 7 - user's requirement Soieenes ‘elabilt Timeliness Precision = — ; inancial ant Primarily financial Financial and it Types of Date Pn 7 Nonfinancial Nonfinancial Time FidoncalPasiPasawe Both historical and future Future oriented/active Orientation oriented Unifying ‘Accounting equation Definition and Management's decision Concepts _(A=L +E) Classification of costs___making Content Pertains to the business Based on a cost object —_Pertains to individual as a whole subunits of the business Format Highly aggregated Can be detailed or Very detailed (condensed) aggregated Frequency Annually and sometimes Depends on the purpose As frequently as needed quarterly by management As required by regulators The Finance Department ¢ foeccmudae leet. or CFO usually reports directly to the chief executive and risks of the ra 1 a A 2 is mainly responsible for the different financial matters for finance, delegates hie 0. oF sometimes being referred to as the vice president table below shows th mid Fesponsibilities to the controller and the treasurer. The © comparison between the controller and the treasurer.Table 1.4. Comparison of the Controllership and Treasury Functions Controller Treasurer Responsible for the financial information Responsible for the financial transactions Investment management Preparation of budgets, FS, tax returns, analysis, etc. = Credit and collection Planning and contro! + Relationships with financial institutions and investors Provision of capital Reporting and interpreting Evaluating and consulting Tax administration + Short-term financing Government reporting + Banking and custody Protection of assets + Insurance Economic appraisal Controller, or sometimes referred to as the chieffhead accountant, is responsible for the financial information which includes budget and financial statement preparation, government reporting like preparation and filing of tax returns and general information sheet (GIS), while a Treasurer is responsible for the financial transactions or those transactions that will involve cash such as investment management (regardless whether investment in debt or equity securities), credit and collection, relationship with the investors and shareholders, and banking. Staff Manager The finance department (CFO, Controller, and Treasurer), together with the head of the human resources division, are considered a staff department. Their job is to support the organization in terms of its financial needs and transactions. The chief executive officer, chief operating officer, and head of marketing and sales are occupying line positions since they are directly involved in the achievement of the goals of the organization of earning profit through the purchasing and selling of goods. Line authority positions make decisions and execute actions that are directly related to the primary objectives of the organization, while a staff position gives advice and support to those who are in the line positions and other staff positions. Itis clear that line authority does not have power over staff position. However, any actions that staff positions will execute are always based on requests from the different departments of the firm. For instance, the finance department will manage cash flows based on the requests and plans of the different operating departments.PRACTICE ON THIS Try searching for organization charts ov! b titles are most likely to practice financial accounting. Which of the Positions p the prevailing salary range of thec., er the internet and list the position). or jo exercise management accounting? Look u| positions. Share your findings in class. CHECK YOUR UNDERSTANDING Assign the following functions to the rightful organization positions. Function Organization Posts 1. preparation of proposals for Chief ManagementAccountant product promotions Controller 2. establishment and Treasurer implementation of the financial planning process 99 9 P Marketing Director 3. _ protection of company resources and economic valuation ie CHECK FIGURE: #1 -D 4. arranging short-term financing * 5. credit and collection 6. government reporting Ss DISCUSSION POINT ) Which is larger in scope—an accounting information system (AIS) or a management information system? Information systems may vary from financial to personnel, and to logistics concerns of an enterprise. Management information system (MIS) is a set of data collection, analysis, and report preparation functions that serve as the backbone of management decisions: but not necessarily purely financial only. A wise manager does not rely on instincts and intulton on Remember, management is both an art and science. It requires careful study of facts ae ot The AIS, which stores, summarizes, and reports financial data in the form of financial eae a ae a subsystem of MIS. One may say, the AIS is only one source of financial dataLESSON 4 Code of Ethics for Management Accountants LEARNING OUTCOME At the end of this lesson, you should be able to distinguish ethical from unethical practice of management accountants. LESSON OBJECTIVE Identify the ethical requirements for management accountants. DISCUSSION Since’ corporations are generally considered as private entities, they have the discretion on who to hire as members of their organization. However, in the Philippines, by the provisions stated in Republic Act 9298 or the Philippine Accountancy Act of 2004, any position in any business or company in the private sector which requires supervising the recording of financial transactions, preparation of financial statements, coordinating with the external auditors for the audit of such financial statements, and other related functions shall be occupied only by a duly registered Certified Public Accountant (CPA) if the company has a paid-up capital amounting to P5,000,000 and above and/or an annual revenue amounting to P10,000,000 and above. However, regardless of whether a person is a CPA or not, providing information for management's decision-making requires a certain level of expertise in the field of financial planning, analysis, control, and decision support. Expertise development can be addressed by further education like graduate studies ‘and technical training, and certifications. Nowadays, certifications in any field are available all over the world with varying reputations and backgrounds, depending on the area of specialization an individual wish to concentrate. Management accountants, in order to establish their authority over their craft in an organization, usually aim to become a certified management accountant. The certified management accountant program is being administered by the Institute of Management Accountants (IMA), an organization founded in 1919 in Buffalo, New York. However, the certified management accountant certification program was only created in 1972. The Institute of Management Accountants is committed in helping management accountants expand their professional skills, better manage their organization and enhance their careers.An individual who wants to become a CMA needs the following: Maintain membership with the IMA credited institution or its equivaleny, 2. Hold a bachelor's degree from 4 jonal experience in managemen, 3. Two continuous yoars of profes accounting or financial management Complete and pass the CMA Examination, Abide by the IMA's Statement of Ethical Professional Practice. One of the responsibilities of certified management secures is to behave ethically. This is done by acting and encouraging others wi 7 ' leit Organization to act in accordance with the overarching principles of hones y, fairness, objectivity, and responsibilty. Also, behaving ethically will require adi a to the standards that aim to guide certified management accountants’ con luct. These’ standards ompetence, confidentiality, integrity, credibility, and how to resolve ethical 4 5. include c conflicts. Competence 4. Maintain an appropriate level of expertise by continuing developing knowledge and skills. 2. Perform duties in accordance with relevant laws, regulations, and technical standards. 3. Provide decision support information and recommendations that are accurate, clear, concise, and timely. 4. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. Confidentiality 1. Keep information confidential except when disclosure is authorized or legally required. 2. _ Inform all relevant parties regarding appropriate use of confidential information Monitor subordinates’ activities to ensure compliance. 3. Refrain from using confidential information for unethical and illegal advantag® Integrity 1. Mitigate actual conflict of interest; regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties Ot potential conflicts.2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. 3. Abstain from engaging in or supporting any activity that might discredit the profession. Credibility 1. Communicate information fairly and objectively. 2. _ Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. 3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law. Resolution of Ethical Conflicts 1. Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that case, preset the issue to the next level If you cannot achieve a satisfactory resolution, submit the issue to the next management level. If your authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superiors knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law. 2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics counselor or other impartial advisor to obtain a better understanding of possible courses of action. 3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict. PRACTICE ON THIS For each of the following situations, indicate which ethical standards discussed above is/are most likely violated. Support your answer: 1. A management accountant becomes aware of that certain exception reports are not being filed by the appropriate office manager. He delays informing the owners as he does not want to get the office manager into trouble as he and his wife recently experienced loss of their youngest child.pep stod by his immediate supervisor tg 5 using three assumptions, Ye, formula. He/She seems, 2, Amanagement accountant is reque’ prepare a report comparing projections Sho is having some confusion with one LAMAN ST in‘ 3 are based as appe understand where the assumptions 20 Y Appear to be unrealistic or lacking in some respects He/She does not want to question his/her supervisor that it may appear she is not knowledgeable by, proceeds anyway. CHECK YOUR UNDERSTANDING ant is expected to follow the established rules of a, hen faced with an ethical conflict. I these rules do nox ment accountant should: 1. Amanagement account organization they serve W' resolve the conflict, the manag First consult those charged with governance the soonest time practicable, a b. Communicate the ethical issue to authorities outside the organization. c. Discuss the problem with the immediate head if he/she is involved in the conflict. ' , d. Communicate to the next higher management level if initial presentation to the immediate superior does not seem to resolve ethical conflict. 2. Management accountants are expected to maintain the highest standards of ethical conduct. The CMA code of ethics require: a. Obtain sufficient, appropriate evidence when preparing an assurance report b. Adhere to the applicable financial reporting standards. c. Comply with national auditing standards. d. Not tolerate violations by others. _ CHECK FIGURE: #2-D REMEMBER 7 inate make decisions either on routine or nonroutine activities and whether heoe tating ‘o the planning, executing, or controlling phase. In making those ‘ ons, rel levant information, analysis, and recommendation are needed, which is provided by management accounting.CHAPTER SUMMARY 4. Discuss how accounting information is used in managoment’s sound decision-making throughout the management process. Managers are people in charge of making decisions in order to organize the different resources of the organization in order to achiove its objectives and goals. The managerial cycle will begin with planning which includes the determination of objectives, strategies, action planning, and budgeting activities will include Executing the day-to-day operations and busines directing and motivating people. Controlling, which aims to develop a continually improving organization, has two phases, the evaluation phase, in which the planned action is being compared to actual results, and the design and implementation of corrective actions to aspects that causes variances. Recognize some management accounting concepts useful in strategically managing and controlling costs. As business concepts are being developed or reintroduced in order for businesses address economic threats and other forces, the role of management accountants changes in order to remain relevant in the organization. Under the Strategic Cost Management Concept, some of the cost control techniques discussed include the Just-In-Time Production philosophy, Total Quality Management, Benchmarking, Six Sigma, Theory of Constraint, Business Process Reengineering, and Conventional Costing Concepts. The role of management accountants in these concepts can be summed up into one phrase, it is to provide reliable and consistent cost-benefit information. Differentiate the various branches of accounting and place the role of managerial accountants the organization. Managerial accounting focuses on providing information to managers to effectively and efficiently conduct their responsibilities. Financial accounting focuses on providing information to external users like stockholders, creditors, customers, suppliers, etc. Cost accounting is more focused on cost data gathering and reporting. The finance department is composed of the Chief Financial Officer, who serves as the head of the department. The controller or sometimes referred to as the Chief Accountant is in-charge of the different financial information needs of the company, both internal and external requirements. The treasurer is in charge of the different financial transactions that an organization undertook. It may be classified as financing, investing, or operational activities. The CFO, Treasurer, and Controller are staff managers who provide support services for internal customers.OMAN, HAGernent ae 4. Identity the ethical requirements 107 9! - a become iid ANAYEIOEY ieesny jornent Aecouriasrits WMA). riya An individual who wishes : stitutes Of Me must be a amber of the In te OMA examination, and abie which includes standards 17 5 COIpOlenies. ont of athical protess py the 4 ent ire ty guides a OFAK senility, IOMGENL, FOO, A005 ty 5, te AMOL ANE Cotta 4 conti standard includ resolve athical conflict LEARN WITH OTHERS. groups and visit the website of the Institute « study View the Jatest syllabus for the certite n, Distribute the topics in the Outing OvE8 the Nutting, Managerner Form yourself into Management Accountants, a ant (CMA) examination Saat discuss why these topics are relevant to practic, ‘a 0 { groups. Each group wi ; Oa em accounting. The discussion will bo modoratod by your class, ads, managemer CHAPTER PROBLEMS AND EXERCISES Problem 1 (True or False): Determine whether the staternent is true or false. If the statement is false, underline the word/s that made the staternent false 1. Managerial accounting applies to all types of business-service, merchandising and manufacturing and to all forms of business organizations 7%. Planningis the process of keoping the company's activities on track Managerial and financial accounting reports are similar in that both are based on completed transactions. ' 4. Ideally, managers continually evaluate plans to achieve company objectives and the results of following these plans, 5. Financial accounting reports are general purpose reports. 6. Perfor Fmance evaluation is an important part of the controlling function of management, Decision-making i ir ig is an i ZA a 'mportant part of the Planning function of management Zs Itis not ally important that be aca accountants behave ethically since what they 49 will always be specif AAP. ically b ly bound by accounting rules such as G Many account in have standards ee organizations, such as the IMA and the AICPA ‘ ehavior their 10. Being ethical and making embers should follow. ethi : character, which can be gern Na CMOIC®S is part of the integrity of a perso"® ery im ir : portant to CEOs hiring CFOs. StRatEGIe Cosy MANAcirsapn 1 SEMENPersons who directly make decisions are said to have line positions, while W providing support toward the organization's objectives are in persons indirectly staff positions. . Intoday’s organizations, the CFO (Chief Financial Officer) is often a key person in top management whose role is considered critical in providing accounting and financial leadership and information for the organization. The CFO may have both the accounting (controller) and the treasury/cash functions reporting to him or her. 74. Managerial accounting provides financial statements both to managers and to external stakeholders. 75: Strategies are activities that can be applied by anyone in their businesses. pes Problem 2 (Fill-in the blank): Choose the term or terms below that most appropriately complete the statements. Budgets Planning Line Controller Feedback managerial accounting nonmonetary data financial accounting Chief Financial Officer Decentralization Staff Performance report directing and motivating Precision : Managerial 1. ACCOUNTINGis concerned with providing information for the use of those who are inside the organization, whereas is aa Gined with providing information for the use of those who are outside the organization 2. Planning consists of identifying alternatives, selecting from among the alternatives the one that is best for the organization, and specifying what actions ‘al be taken to implement the chosen alternative. irecting and i 3. When g : Ind motivatl DY to-day activities and keep the organization functioning smoothly. 4. The accounting and other reports coming to management that are used in controlling the organization are called 5. The delegation of decision-making authority throughout an organization by allowing managers at various operating levels to make key, decisions relating to their area of responsibility is called decentraliza ion LESSON 4: Conk or France ene ManackMENT ACCOUNTANTS 23at is diredtly related to achieving 4, tion chart tha i i A position on the organizal Raa position ‘ base objectives of an organization Is called a Jes position provic Da 7. a_statt tion i does not directly achieve the basic objective of the organization a 's organization. service or assistance 10 other pay, > Of the in charge of the accounting department is generally known, as 8. The manager in char: d formally in Budget Jans of management are expresset 9. The plat rt to management comparing budgeted data to actual data for . Adetailed repo . 10 specific time period is called a performance report p CFO ig the member of the top management team who ig 11. The ible for providing timely and relevant data to bash ae and ee aciviles and for preparing financial statements for external users. control ; ici d 12, Managerial accounting places less emphasis on FecisiOn _ and more mphasis on NONMON in financial accounting. e Problem 3 (Financial versus Managerial Accounting): Place anXin the appropriate sui to show in what branch of accounting the statement is pertaining to. | Financial Managerial Accounting Accounting | i fail 1. Reports are provided outside the organization ~ external reports 2. Does not follow GAAP and there are no reporting regulations Reports past activities — based on a historical 7 perspective : Prepares reports only for management's internal use Reliability of data is emphasized ~ Reports take more time to provide. +. Relevance of data is emphasized over reliability. Provides information to make decisions regarding the future Focuses on precise information since they are used outside the company Focuses on timeliness of information Summarized data for entire company as a whole = + we Za eetnce Department): Place an X in the appropriate column to does the statement pertain to 2 Controller Treasurer Problem 4 (The Fina’ show in what position Responsible for the maintenane F accounting records @ controlling the company cash position Diity tor relations with the company’s financial ‘ons and major creditors + ‘sible for the preparation of budget and ance evaluation report [F Responsible for recordkeeping, tracking, and controlling | the financial effects of prior and current operations Preparation of tax returns, the annual report, and - ities and Exchange Commission (SEC) filing 7 \ @ Obtains and manages the corporation's capital = 70. Responsible for managing corporate assets [i] Planning the finances and capital expenditures = 72. _ Interpretation of financial data ber 73. Managing the investment portfolio ames 74, Appraisal of results of operation and making - = Recommendations 15,_ Formulating credit policy Problem 5 (Emerging Business Concepts): Identify whether the item being described by the statement is Just-In-Time Philosophy (JIT), Total Quality Management (TQM), Benchmarking (BM), Six Sigma (SS), or Theory of Constraint (TOC). Answer by providing the acronym beside each statement. 4. Management approach that emphasizes the importance of managing constraints TOC 2. Only few suppliers will be maintained that are willing to make frequent small deliveries. J|T Management of bottlenecks that might delay or stop progress |OC Itis as simple as comparing what you currently have with that of your neighboB M Ameasurement standard for product variation Ss Everyone in the organization is required to participate. T QM See eS oe productivity, lesser resources requirement, and better utilization of workforce ,Systems implemented to reduce defects in finished products with the goa) af 8. achieving zero defects SS 9. Focuses manegeren's attention to factors that are limiting the capabilities oy the system TQMbo. ttemphasizes zero detects, elimination of wa Producing to meet customer demand with ni in the production process J|T There should be a reduction in setup time so as to economically produce srna\) ste, and continuous improvement, 10 buildup in inventory at any pony 12. batches. J 13. It originated from a process called reverse reengineering. BV] 14. The organization should focus on improving goods from the consumer's viewpoint. TQM Ademand-pull production concept rather than a push-through system JITis. 16 17. 18. It is about identifying, analyzing, and adopting best practices. BM Focuses more on customer satisfaction] QM Focuses on that one aspect of the system that is limiting its ability to achieve more of its goal Aims to improve the product, reduce costs, and improve profits through the DMAIC process SS It aims to identify and remove the causes of defects and errorsSS 19. 20. Problem 6 (Code of Professional Ethics): Identify whether the item being describe by the statement by writing Competence, Confidentiality, Credibility, or Integrity. Maintain an appropriate level of professional expertise by continually developing knowledge and skills. Competence 2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. Integrity 3. Disclose all information that would reasonably be expected to influence 2" intended user's understanding of the tion. Crecibilt 9 reports, analyses, or recommendat %. 4. Refrain from u: 129 information for unethical or illegal advantage. gont entia rm professional duties in accordance with relevant laws, regulations and technical standards. Competence 6. _Inform.all [Link] regardi i ; : Conta een y garding appropriate use of information. as aoe hs sagsae ~~ Mitigate actual conflicts of interest; regularly communicate with business associates to avoid apparent conflicts of interest Integrity Communicate information fairly and objectively Credibility Provide decision support information and recommendation that are accurate, clear, concise, and timely. Credibility Keep information from other parties except when disclosure is authorized or legally requireaConfidentialityLil CHAPTER 2 NCEPTS AND ANALYSIs, shri, cost CO Introduction management One of the most important concepts in accounting is cost control. Using the concept of control discussed in the previous chapter, cost control is simply the continuous improvement of costs. However, Management needs to understan¢ how and why costs behave as such, and what are the elements that fect its incurrence and its behavior, which may impat the decision-making Process. In this chapter, you will learn more abou! basic cost concepts and Classifications, which will enable an accountat! to prepare reports needed by management in discharging their various ‘stewardship functions, 28LESSON 1 Cost: Fundamental Concepts and Classification LEARNING OUTCOMES At the end of this lesson, you should be able to : . explain the various treatments of costs for management and other reporting purposes, and differentiate costs as used in management accounting topics. LESSON OBJECTIVES + Define and explain the concept of cost. + Classify costs as to purpose, traceability, quality. behavior, control, relevance, and DISCUSSION Definition of Cost Cost can be defined as the overall sacrifice made or to be made to achieve an objective. Under managerial accounting, the concept of cost will include those items that require cash outlay and those that, although do not require cash outlay, can result in a loss in income. Unlike in financial accounting, only items that requires an outlay of resources will be recognized as cost. For example, when dropping a product line, under managerial accounting, the cost of dropping the line will include the disposal of equipment, salaries of personnel to be laid off, possible lost sales, etc., while in financial accounting, only the disposal of equipment will be recorded in the books of accounts. Cost Treatments In classifying the different types of cost, the point of reference will be used as the basis to give context on how a cost item will be classified. This is summarized in the table below: Table 2.1. Cost Treatments Point of Reference Cost Classification As to Purpose Product versus Period Cost As to Traceability Direct versus Indirect Cost a As to Behavior [ Variable versus Fixed Cost 29a se or vases G4SU RIZAL COL COLircr acontrollable ple versus None! ntial) versus Irrelevant Relevant (Differ ment Costs to Manage! and effects on decision-making ification, Relevance of Understanding The study of costs, its concepts. ee discussed in Chapter 4, the objective will be the center of managerial accountng ved seen revenues excead expenses nich 1s of mana yement is to earn profit, w' a i concerned; itis beyond the subject controlling i planning and con ne hand, marketing experts spend most of g subjects. In 0 gn how acompany will be able e revenues, eycan ang customers. On the other hang i h proper planni opeliave that the best way t0 derV profit is ae Tey i ‘ng accountants Bellet ‘nat is in any given level of sales earned by , it can and control of ace 5 were utilized. Hence, we focus ourselves ae : ie vias Sead: how it behaves, and its relationship : ane and activities. A major concept in accounting is the sil be re Sion which states that benefits should always exceed its costs, ping the other way around, a company should not incur any costs if such costs will not result in a higher benefit. ih as far matter of any aaccountin their time figuring out how they ¢¢ to increase revenues by acquiring an Another concept that students must understand is that the cost incurred will always be equal to the amount of activities a company undertakes. It is the same way of saying that if there will be activities; there will always be costs involved, Therefore, if the management wants to control its costs, it needs to control its activities. However, there is a caveat: there are costs that respond to a particular activity while being constant in relation to another activity. Some changes in costs can be felt immediately, while some takes time before any improvements are felt: The challenge for managerial accountants is to provide information that can guide management in selecting the right activities that can lead to the most effective and efficient activities and operations. Classification as to Purpose: Product and Period Costs our i: ee be classified as a product or a period cost depending on the 's Incurrence or the reason why such cost is being incurred. If the ; bringing fe Reaaine incurrence of cost is due to the production process 0 page Bruit tou ail ee use, then such cost will be classified as product company, product cost vid nt on the type of business. For a merchandising nonrefundable taxes, less : a Purchase price of the inventory plus freigh! cost will be composed of any discounts, while in a manufacturing firm, produ Pp of the cost of direct materials, direct labor, and manufacturing 30oa eae overhead. Direct materials represent the different components, ingredients, of parts of the finished product. Direct labor refers {0 the amount paid to laborers who Prestly” handle the goods being produced. Manufacturing overhead signifies all manufacturing costs that are not classified as direct materials and direct labor. This will include indirect materials, depreciation of production equipment, factory utilities and insurance, production supervisor, etc. ifthe reason for incurring costs is due to the selling and administrative activities performed during the period, it is considered @ period cost that is expensed outright and not capitalized. Selling expenses are cost incurred from the time the product is being offered to the public through advertisements and promotions up to the time the product is delivered; cost of delivery will include the salaries of the delivery men, gas, and depreciation on delivery equipment. Selling expenses will also include costs incurred to maintain customer relations such as warranties and expenses of the customer relation department. Other period costs are general and administrative expenses, which include costs pertaining to the general management of the business. Examples are the salaries of upper-level executives (except for production and sales executives), and information technology, accounting, and human resource department expenses. What makes the classification of costs into product or period cost crucial is the concept of deferral or capitalization of inventoriable cost. Product costs are inventoriable costs since it will be debited to an inventory account during incurrence and will remain in that account until such time that the inventory is sold wherein it will be debited to the cost of goods sold account even if the sale will occur on a different period from its incurrence, while a period cost will be expensed outright on the period it is incurred. Figure 3.1 shows the flow of cost of both product and period costs. Figure 3.1. Flow of Product and Period Costs Asset (inventory) Expense When Sold (Cost of Goods Sold) ‘When Incurred (Operating Expenses) Product Costs Incurred Period Costs Classification as to Traceability: Direct and Indirect Costs Acost is a direct cost if it can be traced or identified easily to the cost object and its amount is material, while all other costs not classified as direct will be part of indirect cost. A cost object is anything that will be the focus or subject of cost information like a unit of a product. Examples of cost objects are a table, a class— even a person can be a cost object, as long as it can be the subject of a cost report. aSs + cost is called cost tracing, since the main criterion “direct is the ease of traceability. Howeye,, The process of identifying direct especially an entity's product, there ay, in determining whether a cost is direct orn the total cost of a cost obje o ste tat are not directly related to the individual product but are used and dij sano tion process. These indirect costs should be included associated with the production P! the cost principle, which states that a « duct cost to adhere to i : w nclue al costs +e ave atributable in bringing the asset tots intended yx whether directly or indirectly traceable 10 8 particular unit. Hence, there 19 nosy ‘loeation or the process of incorporating indirect cost to the total cost of icc Cost vig have been covered in cost accounting materials cost object. Cost allocation sho ‘als, notice earlier that there is a distinction between ig. A material will be considered direct if a natural o ponent, part, or ingredient is easily traceable o identifiable in the finished product and is material in value, while indirect materials are all other materials being used in the production but are not classified as direct materials. For example, in manufacturing a table, wood and paint will be classified ge direct materials, but wood glue, sandpaper, and lubricants for machines are The same thing is applicable with labor; direct labor considered indirect materials. coste are those paid to manufacturing personnel who “directly” handle the goods being produced. Examples include the cook and chef for a restaurant, sewer for a sewing company, and carpenters for a construction company. Indirect labor costs are those paid to people who are involved in the manufacturing process but do not directly handle the goods being produced. This includes the factory security guard and janitors, and the production supervisor. In the case of mater direct and indirect material artificial resource that will be a com Classification as to Behavior: Variable and Fixed Costs Another way of classifying costs is according to their behavior, or how the total amount changes in relation to activities performed. A cost can be classified as either a variable or a fixed cost depending on its relationship with a cost driver. A cost driver is any activity that causes the incurrence of ‘cost. Cost drivers can be direct labor hours, direct labor costs, units produced, units sold, machine time, number of orders received, among other things. A variable cost is a type of cost that remains Constant ona per unit basis, but its total will vary depending on the level of the cos! pee g tee cost will remain constant in total but will vary on a per unl = vaiche parca the level of the cost driver. Gasoline expense will be classified hisesid'es the e ae driver is the miles driven, since total gasoline expenses ss ine nuiiter saa er of miles driven increases. However, if the cost driver will Gonunberal paseengan ie it will be classified as fixed cost since regardless of gers, the total gasoline expense will remain the same.Classification as to Control: Controllable and Noncontrollable Costs ~ A cost can be classified as a controllable or noncontrollable cost depending on how the decision of a particular person or manager can influence the level of costs tobe incurred. Controllable costs are discretionary ites that can be easily changed by management decisions, while noncontrollable costs are committed items that cannot be changed or reversed immediately by management. Controllable costs include consultant's fee, company outing, and advertising, while noncontrollable costs include depreciation of production equipment, salaries of regular employees, snd insurance on facilities, among others. This cost classification will be discussed extensively under responsibility accounting. Classification as to Relevance: Relevant and Irrelevant Costs When considering cost in making decisions, it can be classified as either relevant or irrelevant costs. A cost is a relevant cost when it differs between alternatives. It is sometimes referred to as differential cost. A differential cost can be an incremental cost or the increase in cost when a particular alternative is chosen as compared to the other alternative. For example, when deciding the means for transportation, the amount of fare you need to pay when you take the LRT, which is around P20.00, will be different from the fare when taking a bus, which is around P14.00. Another, when deciding to watch a movie, the cost of the ticket in a movie house, which is around 350.00, will be different to the cost of the subscription of live movie streaming app, which is around P150.00. Another type of relevant cost is opportunity cost, which refers to the foregone benefits for not choosing a particular alternative. The salaries that you should be receiving if only you decided to work instead of studying is an example of opportunity cost. The hard part about opportunity cost is in estimating the total amount foregone. For example, it will be very difficult to estimate the total amount of sales that will be lost when a product line is dropped since we cannot really identify how many customers are still willing to buy such product. However, it is very important to consider such costs when making a decision to determine what is the most feasible choice among the different alternatives available. Costs that have already been incurred and paid for and cannot be recovered are called sunk costs. The amount spent on salaries and utilities during the past periods or the costs of equipment purchased are example of sunk costs. In short, any cost that has already been recorded in the accounting system is considered sunk cost and should not be considered in any decision in the future. Also, those costs that cannot be avoided or would not differ in any alternative or situation is likewise considered as sunk cost. coy7 Classification as to Quality: Conformance and Non-Conformance Costs In line with implementing a TQM system, costs to be incurred can be Classitigg ce costs. Conformance costs ara mi or non-conforman thoes ote inane hat not occur or do not exist. Hence, there are two ® two ensure that defects will incurred tos rnformance costs: preventive costs, which are those incurreg herenearaties I be minimized, and appraisal costs, which .” jot happen or will cats neurod to oheck f defects have occurred. Training personnel and Supplier. ir mples of preventive costs, hh; intenance are exal nae nd conducting preventive mai ihepection of jason materials, goods in process, and finished goods are examples it of appraisal costs. On the other hand, non-conformance costs can also be called failure cog. in , since they represent the defects that have occurred. There are two types of failure costs, internal and external failure costs. Internal Failure Costs are defects that have been discovered internally or while the goods were still with the company. Examples include scrap, waster, and reworks. External Failure Costs are those defects that are already identified by the customers or when the goods are already out of the company's hands. Examples include warranty, product recalls, and lost sales. PRACTICE ON THIS Practice #1: Classify the following costs as either product or period cost, direct or indirect, variable or fixed, and controllable or noncontrollable. 1. Sales commissions earned by a company’s sales CHECK FIGURE: force ; 1 —period cost Raw materials purchased during the period p 2. 3. Current year’s depreciation on a firm’s manufacturing facilities 4. Wages earned by machine operators in a manufacturing plant 5. _ Marketing costs of an electronics manufacturer 6. Production Supervisor's salary incurred by a manufacturer of office equipment 7. Lease payments for the President's automobile 8. Property taxes Paid on the factory facilities 9. Lubricants Purchased for the Production equipment 10. Executive salary of a multinational companySs Practice #2: The following information pertains to the quality activity of Tarlac Company: Testing 120,000 AC Rework 55,000IFC Training 90,000 PC Product liability insurance 70,000EFC Quality surveys 86,000 AC Customer surveys 30,000 AC Reinspection and retesting 35,000 AC Warranty repairs _100,000E FC 586,000 Total quality costs failure costs. CHECK YOUR UNDERSTANDING CYU #1. Classify the following costs as either product or period cost, direct or Required: Compute the total preventive, appraisal, internal failure, and Ok 271k 59k indirect, variable or fixed, and controllable or noncontrollable. 1. 2 eR ww CYU #2, Fado Company's quality cost report is to be based on the following data: Gold for making jewelry Sandpaper for furniture making Paper used in printing books Milk to make ice cream Water to make ice Net cost of scrap Quality circles Training assistance given to suppliers Depreciation of test equipment Returns arising from quality problems Systems development Inspection of incoming materials 6. Seats to be installed in a car 7. Leather to make gloves 8. Tape measure used by tailor 9. Flour used in making bread 10. Pineapple in a fruit cocktail P18,000 P84,000 P30,000 P32,000 P59,000 P45,000 P10,000 external 170kSupplies used in testing and inspection 68,000 234,000 Product recalls 34,0 0 Support assistance given to customers 18,000 62,000 Disposal of detective products P 56,000 Debugging software errors Required: Compute the total preventive, appraisal, internal failure, and externa) failure costs. REMEMBER 1 ROD Cost the overall sacrifice made or to be made to achieve an objective. Expense represents expired benefits. Expenditure is the actual cash outlay. In classifying costs, remember key questions to analyze properly. Product Costs and Period Costs = What was the purpose of the cost that was incurred? Is it to produce or sell the goods? Direct Costs and Indirect Costs = Is the cost easily traceable to the cost a. object? Variable Costs and Fixed Costs = Do the cost varies when the cost driver varies or does it remain the same? d. Controllable Costs and Noncontrollable Costs = Can management easily alter its decision to incur the cost? Conformance and Non-Conformance Costs = Did a defect occur?ane SON 2. Cost of Goods Manufactured and Sold LEARNING OUTCOME At the end of this lesson, you should be able to walk through the basic product ting process. LESSON OBJECTIVE Compute Cost of Goods Manufactured and Cost of Goods Soid. DISCUSSION This section focuses on the discussion of the cost flow of a manufacturing business since it will allow'us to appreciate the concept of cost. The manufacturing operation will begin when direct materials are put into process with the incurrence of direct labor and manufacturing overhead. The process will end when the goods in process are finished. Figure 3.2 shows the flow of costs in a production process up to the time the product is sold. Figure 3.2. Flow of Cost ina Manufacturing Process Production Sales Product Costs Manufacturing Overhead Direct Labor Work in Process (inventory) Finished Goods Cost of Direct Materials (inventory) Sale (inventory) In the diagram, the process will require the recognition of three types of inventories, direct raaterials, work in process, and finished goods. Work in process pertains to goods that are still in process at the financial reporting date, while finished goods are goods that have already been manufactured and are waiting to be sold. Other cost concepts involved in the analysis of product costs are prime and conversion costs. Prime cost is direct materials plus direct labor which are the primary costs in the production process, while conversion cost is direct labor and manufacturing overhead since they are costs incurred to convert direct materials into finished goods.S ufactured and Sold a report called Statement OF Cog, used showing the amount of direc, Statement of Cost of Goods Mant accounting foram of oes Menutactured will have 7 i Lar Se aedingterseres materials, direct labor, and manta ng head ving ventory ol we won 2c On ole of foods finished or the cost of ae manutactueg process to show the amount oe vranufactured simply reflects tl br mie cost in Lad aoa Oar an with determining the amount of direct materials Cee ; lia to the direct labor and manufacturing overheag used during the period, ay manufacturing costs, which will then be — tothe ea beginning balance to find out how much goods were put tales Pe teens of the work in process inventory will be deducteg a into process to know how much the cost of goods are jr itement. manufactured. Table 2.2 shows the format of the stal anufacturing busine’ be expanded to compute the cost of goods sold by simply adding tees iio ate which replaces net Poel ish aes merchandising business, to the beginning balance of finis| “ gt ne ry to determine the total goods available for sale and deducting the en it i alance of finished goods inventory to determine the cost of goods sold which wil appear in the statement of comprehensive income to be deducted from Net Sales to find out how much was the gross profit. Table 2.2. Statement of Cost of Goods Manufactured ABC Corporation Statement of Cost of Goods Manufactured For the year ended Beginning — Materials x Purchases Xx Total Available for Use xx Less: Ending ~ Materials a) Direct Materials Used Xx Direct Labor Xx Manufacturing Overhead Xx Total Manufacturing Costs a Beginning ~ Work in Process Xx Total Goods Put into Process x Ending ~ Work in Process i Cost of Goods Manutactured ae xPepe” Table 2.3. Statement of Cost of Goods Sold AG Corporation Statomont of Gost of Goods Sold For the yoar ended Boginning ~ Finished Goods uw Cost of Goods Manufactured we Total Goods Available for Salo ws Ending ~ Finished Goods (vn) x Cost of Goods Sold The following data has been taken from the accounting records of Bulacan Corporation for the year ended December 31 Direct Materials ~ Beginning 80,000 Direct Materials — Ending 140,000 Work in Process ~ Beginning 140,000 Work in Process ~ Ending 100,000 Finished Goods ~ Beginning 240,000 Finished Goods ~ Ending 320,000 Purchases of Raw Materials 240,000 Direct Labor 200,000 Manufacturing overhead 260,000 Bulacan Corporation's statement of cost of goods manufactured will be presented as follows: Bulacan Corporation Statement of Cost of Goods Manufactured For the year ended December 31 Beginning — Direct Materials 80,000 Purchases 240,000 Total Available for Use 320,000 Less: Ending — Direct Materials (140,000) Direct Materials Used 180,000 Direct Labor 200,000 Manufacturing Overhead 260,000 Total Manufacturing Costs 640,000 Beginning — Work in Process. 140,000 Total Goods Put into Process 780,000 Ending ~ Work in Process (100,000) Cost of Goods Manufactured 680,000BS rporation's statement of cost of goods sold will be presented as follows Bulacan Corporation it of Cost of Goods Sold Bulacan Cor ‘Statement For the year ended December 31 Sant 0 Beginning - Finished Goods papell Cost of Goods Manufactured oe Total Goods Available for Sale oe z Goods Es Ending — Finished en Cost of Goods Sold PRACTICE ON THIS The following data hav Corporation for the current year: e been taken from the accounting records of Laguna, Sales 1,980,000 Selling expenses 280,000 Manufacturing overhead 460,000 Direct labor 400,000 ‘Administrative expenses 300,000 Purchases of raw materials 240,000 Finished goods inventory, beginning 240,000 Finished goods inventory, ending * 320,000 Raw materials inventory, beginning 80,000 Raw materials inventory, ending 140,000 Work in process inventory, beginning 440,000 Work in process inventory, ending 100,000 Required: 1. What was the cost of the raw materials used in production during the year? CHECK FIGURE: 2. What was the cost of goods ae ee Manufactured (finished) for the year? What was the cost of goods sold for the year? What was the net income for the year?DWLLS.S&: »--- CHECK YOUR UNDERSTANDING Supply the missing data Company A. SompanyB Company © __ Company D_ Direct Materials 280,000 120,000 180,000 220,000 Direct Labor 110,000 100,000 180,000 Manulacturing Overhead 60,000 80,000 50,000 otal manufacturing costs 460,000 - 360,000 Work in Process-beg. 65,000 120,000 Work in Process-end. an 60,000 150,000 Cost of goods manufactured oe 410,000 Finished goods- beg 150,000 _ 130,000 Finished goods-end 125,000 100,000 170,000 160,000 st of goods sold _ 450,000 _ 570,000 420,000 620,000 580,000 Gross Profit 145,000 - 170,000 a Operating Expenses 60,000 oS Operating Income 25,000 a 20,000 5,000 REMEMBER Beginning Direct Materials + Net Purchases = Available for Use — Ending Direct Materials = Direct Materials Used Direct Materials Used + Direct Labor + Manufacturing Overhead = Total Mfg. Costs Beginning WIP + Total Mfg Costs = Put into Process — Ending WIP = Cost of Goods Manufactured Cost of Goods Manufactured + Beginning FG = Goods Available for Sale — Ending FG’ = Cost of Goods SoldLESSON 3 Cost Behavior LEARNING OUTCOME At the end of this lesson, you should be abl different activity levels. Ie to describe how cost behaves , LEARNING OBJECTIVE Discuss how cost behavior-is affected by cost drivers DISCUSSION In managerial accounting, itis very important for students to have a thorough understanding of cost behavior since this will be the basis and foundation of most if not all, of the concepts and tools used for planning and controlling. Cost can be classified as variable or fixed depending on how they behave in relation to the cost driver and the relevant range. Again, cost drivers are anything that causes the incurrence of cost. It can be the number of units produced, operating hours, number of orders received, direct labor hours, and machine hours among others. The relevant range is the range of the activity level wherein the classification of costs as to variable and fixed is valid and applicable. To illustrate, salary expense is generally classified as fixed cost provided that people will be only working for eight hours in a day, beyond eight hours, salary expense becomes variable since employers are required to pay for overtime hours worked. Hence, for salaries expense, the relevant range will be eight working hours per day. Variable costs are those that remain constant on a per unit basis but increase or decrease as the cost driver increases or decreases. Fixed cost, on the other hand, remains constant in total regardless of the movement in the cost driver but will fluctuate on the per unit basis as the cost driver level increases or decreases To illustrate, following the list of manufacturing overhead, the total costs on different activity level (units Produced) will be as follows: Table 2.4 Types of Cost Utilities ~ Factory (@P8.00 per unity" ae = a =“ oan Factory Supervisor's Salary 120,000 1 on 20,000 Real Property Taxes ~ Factory 50,000 a 7 000 Depreciation - Factory equipment 100,000 ae 10,000 Total Budgeted Mtg. Overhead P 310,000 P = = P a 00 “Cost per unit x No. of Units Produced 42 Stratecic Cosr ManaceMentee — ange in the total utilities factory for every change in the units or vo. this is the reason why such item will be classified as a's salary, real property taxes, and fed oven if there are changes ed costs. In terms of the cost Notice the chi produced, the activity level variable costs while the other cost like Supervise depreciation on factory equipment, remained unchang in ihe activity level, hence, these willbe classified as fx per unit Table 2.5 Types of Cost @10,000 units “15,000 units ~“Dities ~ Factory (@P8.00 per unit) 8.00 P6.00 Factory Supervisor's Salary* 12.00 8.00 Real Property Taxes — Factory" 5.00 3.33 Depreciation — Factory equipment” 10.00 6.67 P 25.00 P 26.00 Total Budgeted Manufacturing Overhead “Cost per unit = Total Fixed Cost + No. of units produced Notice how the different fixed cost per unit decreases as the number of units produced increases while variable cost per unit remains unchanged as the number F of units increases. Variable Costs A variable cost can be subclassified into pure or step variable cost. A variable is a pure variable when the increase in total cost is directly parallel to the increase in the activity level. Examples of pure variable cost include direct materials and direct labor. As the number of units produced increases, a proportionate increase in direct materials-and direct labor occurs. A variable is a step variable cost if the total cost increases in small intervals or small steps. If we were to make a graph of how variable cost moves, it would look like the steps in a staircase. Examples of step variable cost include the gas expense incurred in baking one batch of bread or the salary of a professor for every specific number of students. Diagram 3.3 shows how both type of variable cost will be graphed. Pure Variable Cost Step-Variable Cost -