Lecture Notes 2 – Management Advisory Services
ACC 407 – Management Accounting Refresher Course with Comprehensive Examination
I. Managerial Accounting Activity - an event, action, tsk or unit of work with a
specified purpose
Managerial accounting – also called Management
accounting or internal accounting. It is a field that Classification of Costs
provides economic and financial information for internal
As to type
users particularly managers or decision -makers in an
organization. 1. Product costs – cost incurred to manufacture the
product
Management Functions and the Need for Managerial
2. Period costs - the non-manufacturing costs
Accounting Information
As to Function
a. Planning
b. Directing and motivating 1. Manufacturing cost- cost incurred in the factory
c. Controlling 2. Non-manufacturing costs -cost which are not
incurred in transforming materials to finished
Standards of Ethical Conduct for Management
goods
Accountants
As to Traceability/Assignment to Cost object
Competence
Integrity 1. Direct costs – costs related to a particular cost
Objectivity object and can economically and effectively be
Resolution of Ethical conduct traced to that cost object
2. Indirect costs – cost that are related to a cost
Controller – the chief management accounting executive
object but cannot practically, economically and
of an organization who is mainly responsible for the
effectively be traced to such cost object
accounting aspects of management planning and control.
For Decision Making
Functions of the Controller
1. Relevant costs –future costs that will differ under
1. Planning for control
alternative course of action
2. Reporting and interpreting
2. Differential costs - difference in costs between any
3. Evaluating and consulting
two alternative courses of action
4. Tax administration
3. Opportunity costs- income or benefit given up
5. Government reporting
when one alternative is selected over another.
6. Protection of assets
4. Sunk/past or historical cost- already incurred and
7. Economic appraisal
cannot be changed by any decision made now or
The New Management Practices to be made in the future.
A. Just in time (JIT) As to behavior (reaction to changes in cost driver)
B. Total quality management (TQM)
1. Variable cost- within the relevant range and the
C. Business process re-engineering (BPR)
time period under consideration, the total varies
D. The Theory of Constraints (TOC)
directly to the change in activity level or cost
driver, and the per unit amount is constant.
II. Cost in Managerial Accounting
2. Fixed cost- within the relevant range and time
Cost -monetary measure of the amount of resource given p period under consideration, the total amount
or used for some purposes. remains unchanged, and the per unit amount
varies inversely or indirectly with the change in
Cost object – anything for which cost is computed
the cost driver.
Cost driver – any variable that affect costs over period of 3. Mixed cost- this cost has both a variable and a
time fixed component.
4. Step cost- when activity changes, step cost shifts
Cost pool – a grouping of an individual item upward or downward by a certain interval or step.
Analysis of Mixed Costs
Mixed costs or Total Costs – have variable and fixed cost Cost accounting system
components
1. Job order
TC = FC + VC 2. Process costing
3. Hybrid product- costing system
where:
4. Standard costing
TC = total cost 5. Backflush costing
FC = total fixed cost Type of activity levels
VC = total variable cost 1. Unit level
2. Batch level
VC= variable cost per cost driver x cost driver 3. Product level (or Product sustaining level)
VC = bx 4. Facility level (or General operation level)
where: COST-VOLUME PROFIT ANALYSIS
VC = total variable cost Cost-volume profit analysis – a systematic examination of
the relationships among costs, cost driver and profit.
b = variable cost per cost driver
Elements of CVP Analysis
x= cost driver
1. Sales (selling price and units/volume)
Mixed cost function 2. Total fixed cost
3. Variable costs per unit
TC = FC +bx
4. Sales mix
The cost function
Contribution Margin Income Statement
Y =a +bx
Sales P xxx
where:
Less: variable cost xxx
Y = total cost
Contribution Margin xxx
a = total fixed cost
Less: total fixed cost xxx
b= variable cost per cost driver
Income before tax P xxx
x= activity level or cost driver
Breakeven Analysis
Separation of the Fixed and Variable Components of
Break-even point – the sales volume level where total
Mixed Costs
revenue equals total cost, that is neither profit.
1. High-low meth
Contribution Margin Method
2. Scatter graph method
3. Least squares regression method *Single product*
COST ACCOUNTING 1. Break -even point in pesos
BEPp= FxC
Cost accounting- a part of the accounting system that
CMR
measures cost of decision -making and financial reporting
purposes.
where: BEPp = breakeven point in pesos
Cost accounting process FxC = total fixed cost
CMR = contribution margin ratio
1. Cost accumulation- involves collecting costs by
natural clarification, such as material or labor. 2. Break-even point in units
2. Cost allocation or cost assignment- involves BEPu = FxC
tracing and assigning costs to cost object, such as CM/u
department or products.
DOL = % in profit before tax
where: BEPu = breakeven point in units % in sales
FxC = total fixed cost
where: % = means percentage change
CM/u = contribution per unit
*Multiple Product* Required sales with desired profit
Formulas
3. Break -even point in pesos
Required sales in units Required sales in
BEPp= FxC pesos
WaCMR *Single
product
*
4. Break-even point in units
Desired RSu = FxC+DP RSu = FxC+DP
BEPu = FxC
amount CM/u CMR
WaUCM of profit
before
where: tax
WaCMR = weighted average contribution margin Desired RSu= RSu= FxC+
WaUCM= weighted average unit contribution amount FxC+ (NP/1- TxR)
margin of profit (NP/1- TxR) CMR
after tax CM/u
Margin of safety – the amount of peso sales or the number Desired RSu = FxC RSP = FxC
of units by which actual or budgeted sales may be profit CM/u- Pu CMR- PR
decreased without resulting into loss ratio Pu = SP x PR
MSp = Sp- BEPp
Required sales in units Required sales in
MSu = Su-BEPu or MSp / SP
pesos
MSR = MSp / Sp or MSu/ Su *Multipl
e
where: product*
Desired RSu = FxC+DP RSu = FxC+DP
MSp = margin of safety in pesos
amount WaUCM WaCMR
MSu = margin of safety in units of profit
before
MSR = margin of safety in ratio tax
Desired RSu= RSu=
Sp = sales in pesos amount FxC+ FxC+(NP/1- TxR)
Su = sales in units of profit (NP/1- TxR) WaCMR
after tax WaUCM
BEPp = breakeven point in pesos
BEPu = brea even point un units where:
SP = selling price RSu = required sales in unit
Operating leverage- the extent to which a company uses RSp =required sales in pesos
fixed costs in cost structure.
FxC = total fixed cost
Degree of Operating leverage (DOL) – used to measure
the extent of the change in profit before tax resulting from DP = desired profit before tax
the change in sales. NP = desired profit after tax
DOL = Total CM CM/u = contribution margin per unit
Profit before tax CMR = contribution margin ratio
PR= profit ratio
P/u = profit per unit
SP = selling price
WaUCM = weighted average unit contribution margin
WaCMR = weighted average contribution margin ratio
TxR = Tax rate
References:
Rodelio S. Roque, B. C. (2011). Reviewer in Management Advisory Services. Manila: GIC Enterprises and Co. Inc.
