Accounting for managers: Summary

MV
2023-2024

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Contents
1 Block 1: Introduction 2
1.1 Framing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 You should now be able to . . . . . . . . . . . . . . . . . . . . . . 6

2 Block 2: Decision-Making 7
2.1 Framing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.3 You should now be able to . . . . . . . . . . . . . . . . . . . . . . 11

3 Block 3: Full Costing 12

4 Block 4: Planning & Control 13

5 Block 5: Financial Statement Analysis 14

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1 Block 1: Introduction
1.1 Framing on the recording, allocation, and anal-
ysis of costs associated with producing
What is accounting: Accounting can goods or services. The purpose of this
be seen as a language that com- is to determine the cost of products
municates economic information to or services. It helps in assessing the
stakeholders, creditors, and regulators. cost efficiency of the production pro-
This is important for many different cess and identifies areas for cost control
parties: and improvement. It deals with direct
costs and indirect costs (see further).
• For managers so that they can
Their reporting usually happens in-
formulate plans, control opera-
ternally. While management control
tions, and make decisions.
focuses on providing financial informa-
• For shareholders to show the tion and analysis for internal decision-
value of the investment making. The purpose of this being to
assist management in planning, con-
• For employees’ to provide and trolling, and making informed busi-
show job security and making ness decisions. It involves forecasting,
sure that wages are getting paid budgeting, and performance analysis.
in time. It covers a broad range of topics, in-
cluding budgeting, variance analysis,
• For government to meet performance measurement, and strate-
taxation- and legal requirements gic planning. The reports are tailored
to the needs of internal users, such as
The key difference between managerial managers and executives.
accounting and financial accounting is
who is communicated to. Manage- Thus, the main key differences are:
rial accounting means communication
• regulations for financial account-
to internal users like other managers
ing, optionality for management
within the organisation, for manage-
accounting.
ment purposes. So it is the language
used internally. The goal is to im- • Financial accounting reports to
prove decision-making, increase the the whole of the business, man-
efficiency and the effectiveness of ex- agement accounting reports to
isting operations. different (tailored) parts of the
business.
Financial accounting is communicat-
• Financial accounting is more fo-
ing to interested parties outside the
cused on historical information,
organisation. This must conform to
management accounting focuses
generally accepted accounting princi-
more on future costs and rev-
ples. And is highly regulated.
enues.
Then, there is a distinction between • Management accounting reports
cost accounting and management con- are generally produced at more
trol. Cost accounting focuses primarily frequent intervals.

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1.2 Cost of raw material, this is easy to under-
stand. Examples of an indirect cost
Cost is the sacrifice made, usually mea- are the depreciation of manufacturing
sured by the resources expended, or equipment, utility costs among other
given up, to achieve a particular pur- things. Note that a cost can be indi-
pose. Thus, it is the amount of re- rect and direct at the same time, it
sources in monetary terms to obtain all depends on the point of reference.
something, like a good or service. The Take a hospital as a cost object for
meaning may differ slightly depending example: heating and cooling of the
on the context. Cost object is any item building is a direct cost. Now if the
for which we want a separate measure- cost object is a surgical procedure, the
ment for cost. Thus, an entity, such utility cost is an indirect cost. More in-
as a particular product, service, or de- tuitively: let’s say you’re baking cook-
partment, to which a cost is assigned ies in a bakery. The ingredients costs
is called a cost object. are all direct costs because we know
The reasons for a need of cost informa- exactly for each ingredient how much
tion are was spent on it. Now, let’s look at
the electricity costs to run the oven
• Inventory valuation and financial
and mixers. There are other things
reporting
that these equipments are used for,
• Pricing decisions like breads, cakes and so on. We don’t
know how much electricity was used
• budgeting and profit planning for one batch of cookies. Going back
to the hospital example: this means
• Cost control and reduction that, because there are many surgical
procedures that can take place, so we
There are different types of costs and don’t know the cost of one random
organisations: Manufacturing, mer- surgical procedure. If we change the
chandising, and services. Manufactur- point of reference and look at a specific
ing means that organizations purchase type of surgery, then it is a direct cost.
raw materials from suppliers and con-
vert them to tangible products using Direct cost consists of direct mate-
labour and capital inputs. This in- rials (DM) and direct labour (DL).
cludes some hidden costs like inventory DM means those materials that are
of raw materials, inventory of unfin- directly traceable to the goods or ser-
ished goods, and inventory of finished vices being produced. For manufac-
goods. Merchandising means selling turing: these are the ingredients when
finished products that were purchased the cost object is cookies in a bakery.
from a supplier. In this case, it’s only For merchandising this is the Danone
finished goods, so only inventory of fin- yoghurt sold in a supermarket. And
ished goods. Lastly, services are tasks for services this is the broken phone
or activities provided for clients. that is to be fixed in a repair shop.

Direct costs can be directly traced to Direct labour is directly traceable to

the cost object. Indirect costs cannot. the goods or services being produced.
An example of a direct cost is the price They can be specifically and exclu-

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sively identified with the cost object. cost and the indirect cost, but note
Physical observation can be used to that these two are not equal to the
determine time used to produce prod- variable cost and fixed cost (see later).
uct or provide service. For manu- They do sum up to the same total, but
facturing, this is the cost of convert- values differ. This is shown in figure 2.
ing the raw materials into a product
(the cost of time used for baking the
cookies). For merchandising, this de-
pends on the cost object and can for
example be cost of staff. For a ser-
vice it is the cost of providing the
service that can be specifically identi-
fied with an individual client/service
(like the time to repair the phone).
Figure 2: Total cost
Product costs are attached to the prod-
ucts and included in the stock, so in
the inventory valuation. When un-
sold, it is seen as an asset. When
sold, as an expense. Period costs are
not attached and not included in in-
ventory valuation. This is seen as an
expense. Examples are marketing ex-
Figure 1: Direct Materials (DM) penses, salaries, depreciation. These
Examples expenses are related to time, hence the
term period.
All costs that are not DM or DM are
classified into one category: the over-
Cost behaviour refers to how a cost
heads. These are indirect costs and
reacts to changes in the level of ac-
thus, cannot be specifically and ex-
tivity. This is essential for decision-
clusively identified with a cost object.
making. It speaks for itself that when
This could be the cashiers in the bak-
it is known what will happen when
ery when looking at the reference point
activity changes (or volume of output
being cookies. This is indirect labour,
changes), decisions to take a certain
as they also sell other things. Their
project or do a certain thing may not
time selling things is not directly con-
be made.
nected to selling cookies. Materials
to repair the broken oven are indirect
To help with this, often, fixed and
materials because it is not directly
variable costs are identified. Fixed
connected to baking cookies since the
costs remain constant regardless of
oven is used for different things. Heat-
level of activity (change in output).
ing for keeping the cookies warm is
On a graph this would be a horizon-
another indirect expense because the
tal line if the y-axis is the cost and
other stuff also may need to be heated.
the x-axis represents the volume of
output. Depreciation, insurance, rent,
Total costs are the sum of the direct property taxes, among other things

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are examples of such costs. Not that,
when looking at the cost of units when
output changes, is not constant but
when looking at just the cost, it stays
the same. This makes sense, if the
units made per year doubles, the cost
per unit is halved. Variable costs are
not constant, and thus the graph is a
straight line with a certain slope. If it
costs €1 per unit (cost per unit is con-
stant), then the (variable) cost doubles Figure 4: Stepped cost
if the output volume doubles. This is Example: Silver gym membership:
why the slope goes upwards, this line you pay as you go. Each time you en-
starts at the origin. Note that there are ter the gym or take a class you pay a
other types of costs: step fixed costs fixed amount (1 entrance and 1 class
(also called stepped- or semi-fixed cost the same). Gold membership:
costs). These stay constant for a cer- you pay a fixed fee per month. Classes
tain range of volume of output. Then are not included and need to be paid
the cost moves up, and so on. There separately (fixed amount per class).
are also semi-variable costs, these are Platinum membership: you pay a fixed
like the variable costs, but don’t start fee per month and can take as many
at the origin. This means that there classes as you like. Figure 5 shows how
is a fixed component to it. Even if this would translate into graphs. (solu-
the output is zero, there is still a cost. tions may be more clear in the slides)
The stepped cost graph is shown in
figure 3 and the variable, fixed, and
semi-variable costs are shown in figure
4. The dashed line is what a fixed cost
would look like. The full line if it would
go through the origin it would be a
variable cost and the way it is shown
is how it is as a semi-variable cost.

Figure 3: Stepped cost

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 column. Both amount paid and cost
per visit or class are not constant, so
not platinum. We can see that the dif-
ference between the highest and lowest
amount paid is 24, and the difference
in classes is 3. Meaning that he paid
€8 per class. Which means that, in
the first month he paid €8 per class,
and did 4 classes which means €32
of the €57 was for the classes and a
fixed cost of €25. Repeating this for
the other months, we can see that this
cost per month is fixed. Thus, there is
a fixed cost plus a variable cost. This
means that he took the gold member-
ship.

Essentially, what we did is split up the

cost in its fixed part and its variable
A part. Which was the formula in fig-
ure 2. To do this, we used the variable
cost per unit (VC), the highest total
cost (T CH ) and the lowest total cost
(T CL ), highest output (QH ), and low-
est output (QL ). We call this the high-
low method. This method allows us to
split the full cost into the variable and
fixed costs.
T CH − T CL
VC = (1)
QH − QL

F ullCost(F C) = T CH −V C∗QH (2)

Or

F C = T CH L − V C ∗ QL (3)

Figure 5: Different memberships 1.3 You should now be able

friend gives you how much he paid, to
the amount of classes taken, and his Explain the difference between man-
visits to the gym for 4 months, respec- agement and financial accounting. Dis-
tively. This is (57, 4, 4); (49, 3, 7); tinguish between fixed and variable
(73, 6, 7); (65, 5, 6). This is given in costs, direct and indirect costs, period
the slides as a table. We can calculate and product costs. Apply the high-low
the cost per class or visit in another method. Solve all exercises in Pack 1.

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2 Block 2: Decision-Making
2.1 Framing
Decision-making is the process that in-
volves selecting from a set of possible
courses of action. Short-term decisions
are based on today’s environment and
current resources. They can easily be
reveres or changed in the future, and
they are repeated frequently. An ex-
ample is decision on a selling price.

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2.2 Terminology

Cost-volume-profit analysis (CVP-

analysis) is a systematic method of
examining the relationship between
changes in volume of output and
changes in total sales revenue, ex-
penses, and net profit in the short run.
This is typically shorter than one year.
Volume of output, like in the previ-
ous chapter, can be activity, units of
output, ... It can also be expressed
in monetary terms, which is the sales Figure 6: TR and TC
revenue per volume. The relevant range is when both TR
and TC are in approximately linear.
This gives an idea of the short-term.
The goal of this analysis is to pro- In this range, the total amount of
vide managers with the information fixed costs will not change with volume
about the impact of changes in activ- changes. This is required because CVP
ity. Also, to identify important output analysis only applies in this range be-
levels, such as the break-even point. cause the variable cost per unit is con-
stant, the selling price is constant, and
For curvilinear relationships, the to- the fixed cost is not stepped (thus con-
tal revenue line can be drawn on a stant). This makes the calculations rel-
graph with the cost on the y-axis and atively easy because everything is lin-
the units produced or sold on the x- ear or constant. Remember the total
axis, as shown in figure 6 by the green cost line from last chapter, this was lin-
curve. Curvilinear in this case means ear because the graph is cut off before
that it starts approximately linear but it stops being linear. Recall that to-
to keep selling higher volumes, a re- tal cost is fixed cost plus total variable
duction in price is required. The to- cost.
tal revenue is the selling price per TC = FC + TV C (4)
unit times the number of produced
units. Similarly, there is the total cost The net profit is the total revenue mi-
line, which is the red line on the fig- nus the total cost.
ure. This one actually starts non-
linear, meaning that costs are higher N etP rof it = T R − T C (5)
for low amounts of units produced or
sold. Then there is a linear part, that This means at zero activity (e.g. zero
represents economy of scale. Finally, units produced): total variable cost
there is a non-linear part again. This is zero, and thus total fixed cost is
is when the production goes beyond zero, and since there is no revenue,
the capacity that it can produce and the loss is equal to the fixed cost
cost increases quickly. This total cost (the net profit is negative). This
is the fixed cost plus the variable cost is very easy to understand and the
per unit times the number of units. graph by itself shows this easily.

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 Figure 7: Total cost and TVC, FC
Now, if we add the total revenue in
the relevant range to this, there is an-
other important point: the break even
point (BEP). This is the intersection Figure 9: Profit-volume chart
between the TR and TC lines. At this This profit-volume chart shows the
point, the net profit is zero. The FC profit at each level of activity. As the
are covered by the activities. Every- name suggests, this has the net profit
thing before this, the net profit is nega- on the y-axis and the volume on the
tive, anything after this, there is profit. x-axis (like the units produced in this
This is shown in figure 9. What this case). This is a more convenient way
means: to show the impact of the changes
TR − TC = 0 (6) compared to figure 8. Even though
they say the same thing, the profit-
volume chart is more intuitive because
TR − FC − TV C = 0 (7) everything about the x-axis is profit,
everything below is a loss.

⇒ TR = TC (8) Fixed costs are only fixed in the rele-

vant range because: if the company’s
The fixed cost is covered by the activ- production drops below a level out-
ities and thus: side this range, they will correct this
by reducing fixed costs (thus not con-
TR − TV C = FC (9) stant anymore). On the other hand,
if production is higher, to a point out-
side the relevant range, the company
would have to increase the fixed costs
to be able to produce so much. This
could be getting a new machine to be
able to keep up. Or on the other side
of the spectrum, selling it or leaving
it out of order. Thus, to avoid these
complexities in CVP analysis, we stay
within the relevant range (the linear
area).
Figure 8: Break even point (BEP)

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Example: your friend offers you a cof- The coffees would have to cost €2.25.
fee cart on campus for a week, just for
€150. The friend charges €2 per cof- This example can be translated into
fee, and it costs him €1 to make one formula’s.
coffee, which is the only price that he
FC
will ask you per coffee sold, apart from X= = BEP (18)
the fee you paid for him lending you SP − V C
the cart. The goal is to find when they Or
break-even-point is. We know that at FC
BEP = (19)
BEP: CM
CM is the contribution margin (also
TR − TV C − FC = 0 (10) just called contribution). This is the
difference between the variable cost
Let X be the output, SP the selling
and the selling price (SP-VC).
price, and VC the variable cost:
CM = SP − V C (20)
SP ∗ X − V C ∗ X − F C = 0 (11)
The total contribution margin is the
⇒ 2X − 1X − 150 = 0 (12) difference between the variable cost
⇐⇒ X = 150 (13) and the selling price times the output
((SP-VC)*X).
Thus, the output must be 150 coffees
sold to be able to break even. Any- T CM = (SP − V C) ∗ X (21)
thing greater than that means profit.
Now, let’s say you want to buy a lap- And thus, the profit is the difference
top bag that costs €60. In that case, between total contribution margin and
the net profit would have to be €60. the fixed costs.

T R − T V C − F C = 60 (14) SP ∗ X − V C ∗ X − F C = prof it (22)

⇒ P rof it = T CM − F C (23)
⇐⇒ X = 210 (15)
In words, the BEP is the number of
The steps are the same as finding the
times that we need the contribution
break even point, but with net profit 60
margin to cover the fixed costs.
instead of zero. 210 coffees would have
to be sold that week to be able to buy
that laptop bag. Now let’s say the av-
erage coffees sold per week is 120. The
price per coffee would have to go up
(assuming the average amount doesn’t
change in that case). The output X is
now 120, and the variable we are look-
ing for is the selling price (SP).

SP ∗ 120 − V C ∗ 120 − 150 = 0 (16)

⇐⇒ SP = 2.25 (17)

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2.3 You should now be able
to
Use CVP analysis to assist in decision-
making in single product and multi-
product settings. Construct break-
even and profit-volume charts. Un-
derstand operating leverage. Under-
stand the limitations and assumptions
of CVP analysis.

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3 Block 3: Full Costing

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4 Block 4: Planning & Control

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5 Block 5: Financial Statement Analysis

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