INTRODUCTION TO MANAGEMENT ACCOUNTING

Management Strategic Cost Management

is the process of planning, decision-making, organizing, leading, is the process of reducing total costs while improving the
motivation and controlling the human resources, financial, strategic position of a business. This goal can be accomplished
physical and information resources of an organization to reach by having a thorough understanding of which costs support a
its goals efficiently and effectively. company’s strategic position and which category costs either
weaken it or have no impact.
Basic Function of Management
Planning Subsequent Cost Reduction Initiatives
determination of proper courses of action and strategizing should focus on those costs in the second category. Conversely, it
tactics in order to achieve the goals set. may be useful to increase costs that support the strategic
Organizing position of the business.
is the coordination of activities and resources, and delegation of
responsibilities. SCM (Strategic Cost Management)
Leading use of the cost information as a tool for decision-making and
managing and guiding of people along with proper motivation business development that would support the strategic
and direction. placement of an entity.
Controlling
is the monitoring and evaluation of activities to ensure they Cutting costs may reduce the customer’s experience, that’s why
answer the goals being set. management needs to be involved in the cost reduction
activities to support the competitive position of the firm.
Management Accounting
refers to reports designed to meet the needs of internal users, Controllership
particularly the managers. is the practice of the established science of control
AAA defined it as the application of appropriate techniques and which is the process by which management assures itself that
concepts in processing the historical and projected economic the company’s resources are obtained and utilized according to
data of an entity to assist the management in establishing a plan plans that are in line with the company’s set objectives.
for reasonable economic objectives and in the making of
rational decisions with a view towards achieving these Controller
objectives. officer of an organization who has responsibility for the
accounting aspect of management control.
Management Accounting 2 roles:
concerned with providing information to personnel within an 1. Accumulation and reporting of accounting information
organization. Exclusive for internal users. Management wants to all levels of management
and needs, Discretionary or optional. Can be monetary and non- 2. Directing management’s attention to problems and
monetary like units produced, units sold, number of labor hours, assisting them in solving such problems.
etc. Relevance and timeliness of data. From internal and external
users such economics, etc. Reports are more extensive and Treasurer
detailed. Focused on segments and business. Frequently needed. provision of capital, investor relations, short-term financing,
Future-oriented using current and past data. No unifying banking and custody, credit and collections, investment,
concept or equation. insurance.

Financial Accounting Controller

focuses on financial statements and other financial reports. planning and control, reporting and interpreting, evaluating and
Deals with reporting groups outside of an organization so that consulting, tax administration, government reporting,
some assessment of profitability and overall financial health can protection of assets, economic appraisal.
be made. Primarily for external users. Should be in accordance
of GAAP. Mandatory, particularly by the government. The end Chief Financial Officer
product which is the FS are primarily monetary (financial) in senior executive responsible for managing the financial actions
nature. Reliability (precision of data). To produce financial of a money.
statements. From company’s internal information system. tracking cash flow and financial planning as well as analyzing
Compressed and simplified. FS docus mainly on business as a the company’s financial strengths and weaknesses and
whole. Periodic like annually, quarterly. Mainly Historical or past proposing corrective actions.
data. Unifying concept assets=liability+equity. the role is similar to a treasurer or controller, many have CMA

Internal Auditor
provide independent and objective evaluations of financial and
operational business activities, including corporate governance.
tasked with ensuring that companies comply with laws and
regulations, follow proper procedures, and function as
efficiently as possible.

Line Function
is the authority to give command or orders to subordinates.
exercises direct downward authority over line departments

Staff Function
is the authority to advise but not to command others.
providing line and staff managers with specialized service and
technical advice for support.
exercised laterally or upward

Standards of Ethical Conduct for Management Accountants

Competence (it’s like being capable and professional)
 maintain an appropriate level of professional
competence
 follow applicable laws, regulations, and standards
 provide accurate, clear, concise, and timely decision
support information.
 Recognize and communicate professional limitations
that preclude responsible judgement
Confidentiality (keeping information private)
 not disclose confidential information acquired in the
course of their work unless legally obligated to do so
 ensure that his subordinates do not disclose
 not use confidential information for unethical or illegal
advantage
Integrity (adherence to code of moral values)
 mitigate conflicts of interest and advise others of
potential conflicts
 refrain from conduct that would prejudice carrying out
duties ethically
 abstain from activities that might discredit the
profession
Objectivity (using facts while being fair and unbiased)
 communicate information fairly and objectively
 disclose all relevant information that could influence a
user’s understanding of reports and recommendations
 disclose delays or deficiencies in information timelines,
processing, or internal controls
Cool Cat in Office

COST CONCEPTS AND COST BEHAVIOR ANALYSIS

Cost
is cash or cash equivalent necessary to attain an objective such 1. Direct costs – related to a particular cost object and can
as acquiring goods or services, performing a function or economically and effectively be traced to that object.
producing and distributing a product. o Direct materials
o Direct labor
Cost Accounting 2. Indirect costs – related to a cost object, but cannot
expanded phase of financial accounting which informs practically, economically and effectively be traced to
management promptly with the cost of rendering a particular such cost object. Cost assignment is done by allocating
service, buying and selling a product, and producing a product. the indirect cost to the related cost object.
field of accounting that measures, records, and reports o Indirect materials – panliha, pintura
information about costs. o Indirect labor
For decision-making
Merchandise 1. Relevant costs
- Merchandise inventory 2. Differential costs
Manufacturing 3. Opportunity costs
- Raw materials 4. Sunk, past or historical costs
- Work in process As to relation to an accounting period
- Finished goods 1. Capital expenditure
2. Revenue expenditure
Cost of Sales and Losses As to behavior (Reaction to changes in cost driver)
- Cost of sales/COGS are those production costs incurred 1. Variable cost
related to the units sold. 2. Fixed cost
o Cost of sales are from inventory 3. Mixed cost
o If not sold, reported as ending inventory
o From production cost (not expense outright) Cost segregation techniques
o Unexpired then if sold, expired - Mixed cost may be segregated using the following
- Expenses are those incurred in selling goods, techniques adopted from the fields of statistics
distributing goods and managing a business (operating 1. High-low method
expenses). 2. Scattegrah method
o Selling and administrative expenses 3. Least-squared method
o It does not have any relations to production
o Expensed as incurred (expired) MCQ
o Expense outright 1. The term relevant cost applies to all of the following decision
Both costs and expenses are benefits to the business situation except the (B. Determination of product price)
Losses do not give any benefit to the business Relevant costs are those used in making decision. These costs
have two characteristics – differential costs and future costs.
Different Costs for different purposes (Classification of The term relevant costs applies to the acceptance or rejection of
Costs) a special sales order, replacement or retention of equipment,
As to type addition or deletion of a product line, and even in the
1. Product costs – costs incurred to manufacture the determination of a product price. (B. Determination of product
product. Product cost of the units sold are recognized as price) is the best answer because relevant cost is LEAST
expense (COGS) while product costs of the unsold units APPLIED in the determination of regular selling price.
become the costs of inventory.
o COGS if sold 2. A decision making concept, described as “the contribution to
o Inventory if unsold income that is foregone by not using a limited source of its best
alternative use” is called (D. Opportunity cost)
2. Period costs – non-manufacturing costs that include
- Marginal cost is the increase in cost per unit of product
selling, administrative and research and development
- Incremental cost is the total increase in cost from an
costs. These costs are expensed in the period of
alternative to another
incurrence and do not become part of the cost of
- Potential cost refers to future cost that may arise if an
inventory.
alternative is chosen.
o Expensed as incurred/right away
Opportunity cost – income you lose by not choosing the best
As to function
alternative
1. Manufacturing costs
Marginal cost- cost of making one more unit
2. Non-manufacturing costs
Incremental cost – total extra cost of switching or expanding
Potential cost – possible future cost if a choice is made
As to traceability
3. In a decision analysis situation, which one of the following 5. It applies technical knowledge of various fields of
costs is not likely to contain variable cost component? (C. discipline
Depreciation) 6. It is not governed by GAAP
Depreciation if the problem is silent, it is a fixed cost, not a 7. It uses few junior staff as the engagement is highly
variable neither would contain a variable component. technical in nature and requires competence of the
- Labor is academically treated as variable cost advisor.
- Overhead has both variable and fixed cost
- Selling expense also has variable and fixed cost 5. Characteristics of management services, example situations
- Design and/or installation of accounting system
4. The term that refers to costs incurred in the past that are not - Financial analysis for project feasibility studies
relevant to a future decision is (C. Sunk cost) - Cost analysis of major investment decisions
Sunk cost are those already incurred, cannot be avoided, refer to
the past, irrelevant in making decisions. 7. MAS does not cover those traditional and originating fields of
- Full absorption cost refers to the total costs of accountancy such as auditing, tax services, and legal services.
production without regard to whether fixed or variable These traditional areas of services by CPAs have already been in
as long as the costs are necessary on the manufacture of existence before the advent of the MAS practice and have
a product. already developed extensive and highly technical body of
- Under-allocated indirect cost relates to the amount of knowledge where a specialized area of competence is available.
allocation and not to the period of time
8. MAS includes areas of serving the management outside the
5. The cost described in the I and IV are (C. Relevant Cost) traditional services of auditing, tax, and legal practice.
I. The cost of a special device that is necessary if a special order MAS is done in the areas of finance and accounting, industrial
is accepted engineering, marketing, production, logistics, human resources,
IV. The cost of alternative use of plant space to be considered in information and communications technology, operations
a make or buy decision research, quality control, customer services, and others.
It also covers change in management engagement with
minimizing organizational uncertainties for better preparation
Operating Expenses and use of resources which will lead to favorable results.
As well as re-engineering engagements and computerization
1. The normal decision-making process follows a sequence of a engagements.
reasoned scientific conclusion, as follows:
1. Set objectives 9. MAS engagements activities in order
2. Identify constraints 1. Negotiating the engagement
3. Gather information 2. Preparing for and starting the engagement
4. Identify alternative 3. Conducting the engagement
5. Evaluate alternative 4. Preparing and representing the report and
6. Choose the best alternative recommendations
5. Implementing the recommendations
2. CPA advisor may render study, analyses, research, 6. Evaluating the engagement
interpretation, comment, and the like except for one authority 7. Post engagement follow-up
which exclusively belongs to the manager – that is the power to New PreStar Can PreRep Inspire Excellent Futures
make decisions. Therefore, any advisory engagement that
requires him to make decisions should be rejected 10. Management system control process in sequence
1. Determining standards of performance
3 MAS is not repetitive as far as the same client is concerned. 2. Measurement of actual performance
Once a particular problem area of operations is solved, the same 3. Comparing actual performance versus standards and
is not expected to recur least the solution applied is ineffective analyzing results
which would in return speak of the incompetence of the CPA- 4. Deciding and implementing corrective actions
Advisor

4,6. MAS has some of the following characteristics

1. It involves decisions for the future
2. It covers a wide area of managerial interests
3. It deals with a specific problem where an expert’s help
is required
4. It is not repetitive nor recurring in nature
Relevant Costing and Responsibility Accounting Topics
1. Decision Making Process - maintaining a long-run relationship with suppliers is desirable
1. P – Identify the Problem
2. O – Specify the Objective and Criteria 13. In an insourcing vs outsourcing situation, which of the
3. A – Identifying the Alternative courses of action following qualitative factors is usually considered?
4. C – Determining and evaluating the possible - Skilled labor
Consequences of the alternatives - Special materials requirement
5. D – Choosing the best alternative and making the - Special technology
Decision
6. E – Evaluating the results of the decision 14. In an insourcing vs outsourcing decision, the decision
P - problem process favors the use of total costs rather than unit costs.
O - objectives The reason is that
A - alternatives - Irrelevant costs may be included in the unit amounts
C - consequences - Allocated costs may be included in the unit amounts
D - decision - Unit cost may be calculated based on different volumes
E - evaluation
15. The opportunity cost of making a component part in a
2. Relevant Costs factory with no excess capacity is the
- These are the future costs that are expected to be different - Net benefit given up from the best alternative use of the
among alternatives. capacity
- Oftentimes used interchangeably with terms like differential
costs and avoidable costs 16. A manager is deciding whether it should continue
producing a certain material or just purchase the same
3. Relevance of a particular cost to a decision from an outside supplier. A cost that is irrelevant to this
- It is determined by the potential effect on the decision short-run decision is
- Fixed overhead that will continue even if the part bought from
4. In short-term decision making, Sunk Cost should be an outside vendor
ignored - Fixed overhead is irrelevant since it will continue regardless of
- Since the sunk cost is irrelevant being incurred in the past whether the company decides to continue producing a certain
material or just purchase the same from an outside supplier.
5. Fixed cost is considered Avoidable
- Fixed costs are usually irrelevant, however, if the same are 17. A company’s approach to an insourcing and outsourcing
avoidable, then it automatically becomes relevant since it would decision
now be different between two or more decision alternatives. - involves an analysis of avoidable cost

6. What should be considered as Sunk Cost? 18. In a make or buy decision, the relevant costs include
- Research and development costs of Eliminated product lines variable manufacturing costs as well as
- Avoidable fixed costs
7. This entire amount is usually a differential cost - Fixed costs are irrelevant unless they are avoidable
- Direct cost, these are the direct materials and direct labor that
are usually relevant (part of differential cost) 19. The opportunity cost of making a component part in a
factory with excess capacity for which there is no
8. Which one of the following costs is generally not relevant alternative use is
to the decision? - Since there is no alternative use, there will be no benefit that
- Historical costs as these costs are already incurred and is will be foregone. It would be different if the excess capacity
irrelevant. would be used to produced another product that would
generate a contribution margin (the opportunity cost would be
9. The term “Opportunity Cost” is best defined as the lost contribution margin)
- The benefit associated with a rejected alternative when making
a choice. (benefit foregone) 31. Production of a special order will increase gross profit
when the additional revenue from the special order is
10. The Opportunity Cost of making a component part in a greater than
factory with no excess capacity is the - The marginal costs of producing the order
- Net benefit given up from the best alternative use of the
capacity
32. A company that is operating at full capacity should set
12. Which of the following factors favors the buy choice in a the minimum selling price of a special order to cover
make or buy decision?
- Variable cost-plus forgone contribution margin on lost regular 50. Building another regional service office, the salary of
sales CEO at the corporate headquarter is
- If the company is operating at full capacity, the selling price of - Irrelevant because it is a future cost that will not differ
a special order should not just cover the variable cost but also between alternatives under consideration
the contribution margin it will lose if it cancels its regular sales - It is unavoidable whether to build regional offices or not.
to accommodate the special order.
61. In a sell or process further decision, which of the
33. Not relevant to a decision making to accept or reject an following is irrelevant?
order - Joint production cost
- It applies to all relevant costing decisions, Historical cost are
irrelevant. 62. ABC company produces Product X in a joint
manufacturing process. The company is studying whether
34. Depreciation is considered irrelevant in deciding to sell Product X at the split off point or upgrade the
whether to accept a special order or not. product to become Product Y
- It is being incurred regardless of whether the company accepts -Joint manufacturing cost to produce product X is not included
or rejects the special order.
Note: Joint production costs are not included in the sell or
35. Cost allocation method used to determine the lowest process decision
price that can be quoted for a special order that will use
idle capacity within a production area 66. In joint product costing and analysis,
- Variable Relevant – Salaries for the period when the units were
- It should only cover the variable cost needed to produce the produced
special order Irrelevant – Joint costs to the split-off point, separable costs
after the split-off point, purchase costs of the materials required
36. A special order would be acceptable as long as the for the joint products.
revenue from the special order exceeds the
- Incremental costs associated with the order 68. Constraints may either be internal or external

37. When only differential manufacturing costs are taken 69. Theory of constraints managing bottlenecks or binding
into account for special-order pricing, an essential constraints in production or distribution process
assumption is that
- Acceptance of the order will not affect regular sales 70. Managers should select products with the highest
contribution per unit of the constraining resource
38. The loss of a key customer has temporarily caused ABC - if the company is not subject to any constraints and is selling
Company to have some excess manufacturing capacity. ABC more than 1 product, it should produce the product with the
is considering the acceptance of a special order, one that most contribution margin
involves ABC’s most popular product. The cost should be - if the company is subject to constraints, it should first allocate
considered in the special order acceptance decision are the limited resources to the product with the most contribution
- I. Variable cost of the product margin per scarce resources.
- III. Direct fixed costs associated with the order
- IV. Opportunity cost of the temporarily idle capacity 71. To maximize profit, management should focus on each
- Fixed cost of the product is not included since it is irrelevant product’s Contribution margin per machine hour

39. If the company is not operating at full capacity, then the 72. Company has limited no of machine hours that can use
selling price for the special order should just cover the for manufacturing 2 products.
variable costs needed to produce a special order Assume either product can be sold in whatever quantity
produce, product A should use for the limited number of
40. If the company is operating at full capacity, the machine hours.
minimum selling price for the special order should cover
the variable costs to produce the special order and the
contribution margin lost when regular sales are cancelled
to make room for the special order

49. The computation for shut down point is

- Avoidable fixed cost / Unit contribution margin