BASIC CONCEPTS IN MANAGEMENT ACCOUNTING; COSTS

AND COST CONCEPTS

MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING – the process of identifying, measuring, accumulating, analyzing,

preparing, interpreting, and communicating information that helps managers fulfill
organizational objectives.

MANAGEMENT ACCOUNTANT - a person who provides financial data and advice to a

company for use in the organization and development of its business.

FUNCTIONS/OBJECTIVES OF MANAGEMENT ACCOUNTING:

The basic function of management accounting is to assist management in performing its

functions effectively. The functions of management are planning, organizing, and
controlling. It also provides information that may be used by management for decision-
making.

MANAGEMENT FUNCTIONS AND THE NEED FOR MANAGEMENT ACCOUNTING

INFORMATION

1. PLANNING – involves:
a. setting of immediate, as well as long-range goals for the organization;
b. predicting future conditions that are expected to prevail;
c. considering the different means or strategies by which the goals set may be achieved;
and d. deciding which of the strategies should be used to attain such goals.

2. DIRECTING AND MOTIVATING – involves overseeing the day-to-day activities, seeing to it that
the organization is functioning smoothly, and the members of the organization are mobilized to
carry out plans.

3. CONTROLLING – involves checking the performance of activities against the plan or standards
set and deciding what corrective actions to take should there be any deviation between the
actual and planned/standard performance.
➢ All the aforementioned management functions involve decision-making. In performing the
decision-making function, managers need information. Such information is provided by
management accountants.

MANAGEMENT ADVISORY SERVICES – (also called management consulting services, business

advisory services, management services) - refers to that area of accounting work concerned with
providing advice and technical assistance to help clients improve the use of their resources to
achieve their goals.

CHARACTERISTICS OF MAS
1. Services are rendered for the management rather than for third parties.
2. Involves problem solving.
3. Relates to the future.
4. Broad in scope.
5. Involves varied assignments.
6. Engagements are usually non-recurring.
7. Engagements require highly qualified staff.
8. Human relations play a vital role in each engagement.

MANAGEMENT ACCOUNTING vs. FINANCIAL ACCOUNTING

MANAGEMENT FINANCIAL ACCOUNTING
ACCOUNTING

USERS OF Internal users: officers and External users: stockholders,

REPORT managers creditors, concerned government
agencies
 PURPOSE To provide internal users with To provide external users with
information that may be used information about the
by managers in carrying out organization’s financial position and
the functions of planning, results of operations.
controlling, decision-making,
and
performance evaluation.

TYPES OF Different types of reports, Primarily financial statements and the

REPORTS such as budgets, financial accompanying notes to such
projections, cost analyses, statements.
etc., depending on the
specific needs of
management.

BASIS OF Reports are based on a Reports are based almost

REPORTS combination of historical, exclusively on historical data.
estimated, and projected
data.

STANDARDS OF In preparing reports, the Reports are prepared in

PRESENTATION management of a accordance with generally
company can set rules to accepted accounting principles and
produce information most other pronouncements of
relevant to its specific authoritative accounting bodies.
needs.

REPORTING Focus of reports is on the Financial reports relate to the

ENTITY company’s value chain, such business as a whole.
as a business
segment, product- line,
supplier, or customer.

PERIOD Reports may cover any Reports usually cover a year,

COVERED time period – year, quarter, or month.
quarter, month, week, day,
etc. Reports may be required
as frequently as needed.

MANAGEMENT ACCOUNTING vs. COST ACCOUNTING

COST ACCOUNTING MANAGEMENT ACCOUNTING

INHERENT Revolves around cot Helps management make

MEANING computation, cost control effective decisions about the
and cost reduction business

APPLICATION Prevents the business Offers a big picture of how

from incurring costs management should strategize
beyond the budget

MEASURING Quantitative Quantitative and qualitative

GRID

SUBSET One of the many subsets of Vast in itself

management
accounting
 BASIS OF Historic information Historic and predictive
DECISION information
MAKING

STATUTORY Statutory audit is required Audit has no statutory

REQUIREMENT for big businesses requirement

DEPENDENCE Not dependent on Dependent on both cost

management accounting accounting and financial
to be successfully accounting for successful
implemented implementation

USERS Management, Management only

shareholders, and vendors

CONTROLLER: The Chief Management Accountant

CONTROLLER – the chief management accounting executive of an organization who is
mainly responsible for the accounting aspects of management planning and control

FUNCTIONS OF THE CONTROLLER

1. PLANNING FOR CONTROL – to establish, coordinate, and administer, as an integral part
of management, an adequate plan for the control of operations.
2. REPORTING AND INTERPRETING – to compare performance with operating plans and
standards and to report and interpret results of operations to the concerned users of such
reports. 3. EVALUATING AND CONSULTING – to consult with all levels of management
responsible for policy or action concerning any phase of the operation of the business as
it relates to the attainment of objectives and effectiveness of policies, organizational
structures, and procedures. 4. TAX ADMINISTRATION – to establish and administer tax
policies and procedures. 5. GOVERNMENT REPORTING – to supervise or coordinate the
preparation of reports to government agencies.
6. PROTECTION OF ASSETS – to assure protection for the assets of business through
internal control, internal auditing, and assuring proper insurance coverage.
7. ECONOMIC APPRAISAL – to continuously appraise economic and social forces and
government influences and to interpret their effect upon the business.

DISTINCTIONS BETWEEN CONTROLLERSHIP AND TREASURERSHIP

CONTROLLERSHIP TREASURERSHIP

1. Planning and 1. Provision of capital

control 2. Reporting 2. Investor relations
and interpreting 3. Short-term
3. Evaluating and financing 4.
consulting Banking and
4. Tax administration custody 5. Credit
5. Government and collections 6.
reporting 6. Investments
Protection of assets 7. Insurance
7. Economic
appraisal

CERTIFICATION AVAILABLE TO MANAGEMENT ACCOUNTANTS

THE CMA PROGRAM OR CERTIFICATE IN MANAGEMENT ACCOUNTING

The CMA Program or Certificate in Management Accounting is a program for

management accountants designed to recognize their unique qualifications, high
standards, and professional expertise in the field of management accounting.

Qualified management accountants earn the designation Certified Management

Accountant (CMA), the internal accountant’s counterpart to the Certified Public
Accountants (CPA).

THE ORGANIZATION INVOLVED

In the United States, the CMA Program is conducted by the Institute of Management
Accountants (IMA), the largest US Professional organization of accountants.

In the Philippines, the Philippine Association of Management Accountants (PAMA)

conducts the Certificate in Management Accounting (CMA) program through its
continuing education arm, the Philippine Institute of Management Accountants
(PIMA).
The PAMA is affiliated with the Institute of Management Accountants or IMA.

The PAMA was founded primarily to provide its members with professional and educational
activities that enhance their knowledge of management accounting principles and
methods.

OBJECTIVES OF THE PROGRAM

The CMA has four objectives, consistent with the mission of the Philippine Association
of Management Accountants (PAMA) to "promote management accounting, enhance
the capability of its members and foster high standards of professionalism."
• To establish Management Accounting as a recognized profession in the field of
business
• To encourage stricter and high quality educational standards in Management
Accounting
• To provide objective means for measuring the Management Accountant's
knowledge and competence
• To encourage continued professional growth

COSTS AND COST CONCEPTS

Cost – a measurement, in monetary terms, of the amount of resources used for some
purpose. When notified by a term that defines the purpose, cost becomes
operational, e.g., selling cost, acquisition cost, variable cost, etc.
Classifications of costs

As to Function - manufacturing; selling and administrative

As to elements - materials, labor, factory overhead; all examples of selling and

administrative costs.

Alternative Classifications:

Business Function – Research and Development, Design of Products and Processes,

Production, Marketing, Distribution, Customer Service.

Assignment to Cost Object – Direct Cost, Indirect Cost.

Behavior Pattern in Relation to Activity or Volume - Variable, Fixed, Mixed

Costs.

Aggregate or Average – Total Cost, Unit Cost

Assets or Expense - Inventoriable Cost or Product Cost, Period Cost

Cost Pool – an account in which a variety of similar costs are accumulated prior to
allocation to cost objects. It is a group of costs associated with an activity. Example:
overhead account.

Cost object – the intermediate and final disposition of cost pools.

 Example: product, job, process

Cost driver – a factor that causes a change in the cost pool for a particular activity. It is
used as a basis for cost allocation; any factor or activity that has a direct cause-effect
relationship

Activity – any event, action, transaction, or work sequence that incurs costs when
producing a product or providing a service.

COST BEHAVIOR
COST BEHAVIOR – describes how a cost behaves or changes as the amount of cost

driver changes.

TYPES OF COSTS AS TO BEHAVIOR:

1. FIXED COST – in total: constant within the relevant range as activity output changes; per
unit: changes as activity level changes

2. VARIABLE COST – in total: varies in direct proportion to changes in activity output; per unit:
remains constant

3. MIXED COST – has both fixed and variable components.

COST BEHAVIOR ASSUMPTIONS:

1. Relevant Range Assumption
Relevant range refers to the band of activity within which the identified cost
behavior patterns are valid. Any level of activity outside this range may have a
different cost behavior pattern.

2. Time Period Assumption

The cost behavior patterns identified are true only over a specified period of
time. Beyond this, the cost may show a different behavior.

CORRELATION ANALYSIS
Correlation – measure of the co-variation between the dependent and independent
variables
Coefficient of Correlation (denoted by r) – measure of the extent of the linear
relationship between two variables

Coefficient of Determination (denoted by r2) is computed by squaring the value of

r. It represents the percentage of the total variation in the dependent variable y that
is explained or accounted for by the regression equation.

A very high r2 means that the values in the regression equation explain virtually the
entire amount of the total cost. The variables are highly correlated, i.e., the cost
driver selected is highly related to the dependent cost.

SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS:

1. High-Low Points Method – the fixed and variable elements of the mixed costs are
computed from two data points (periods)—the high and low periods as to activity
level or cost driver.

2. Statistical Scattergraph Method – various costs (the dependent variable) are

plotted on a vertical line (y-axis) and measurement figures (cost drivers or activity
levels) are plotted on a horizontal line (x-axis). A straight line is drawn through the points
and, using this line, the rate of variability and the fixed cost are computed.

3. Method of Least Squares (Regression Analysis) – mathematically determines a

line of best fit or a linear regression line through a set of plotted points so that the sum
of the squared deviations of each actual plotted point from the point directly above or
below it on the regression line is at minimum.
This method uses the following equations in computing for the values
of unit variable cost and fixed cost:
 Equation 1: ∑Y = na + b∑x

Equation 2: ∑xy = a∑x + b∑x2

COST FORMULA: y = a + bx

Where: “y” denotes total cost. It is called the dependent variable because it is
dependent on the value of another variable, the activity level x.
“a” is an estimate of the fixed cost
“b” is an estimate of the variable cost per unit of activity.

VALUE CHAIN

Research Design
and of Products Production Marketing Distribution Custome
r
Development and Processes Service

EXERCISES:
1. Consider the descriptors that follow.
1. Is heavily involved with the recordkeeping and reporting of assets,
liabilities, and stockholders' equity.
2. Focuses on planning, decision making, directing, and control.
3. Is heavily regulated.
4. A field that is becoming more "cross-functional" in nature.
5. Much of the field is based on costs and benefits.
6. Is involved almost exclusively with past transactions and events.
7. Much of the information provided is directed toward stockholders, financial
analysts, creditors, and other external parties.
8. Tends to focus more on subunits within an entity rather than the
organization as a whole.
9. May become involved with measures of customer satisfaction, and the amount
of actual cost incurred vs. budgeted targets.

Required:
Determine whether the descriptors are most closely associated with financial
accounting or managerial accounting.

2. Roles Of Controller and Treasurer Classify the following functions as belonging

either to a controller or a treasurer:

a. Creating financial strategies

b. Preparation of annual budget
c. Creating funding proposals
d. Compiling the cost of production
e. Controlling stocks and fixed assets
f. Maintaining relationships with financial institutions
g. Planning and control
h. Provision of capital
i. Credit and collections
j. Tax administration
k. Short-term financing
l. Government reporting
m. Investor relations
n. Protection of assets
o. Reporting and interpreting

3. Consider the six costs that follow.

a. Advertising and promotion costs of a do-it-yourself retailer

b. Surgical supplies used in a hospital's operating room
c. Aircraft depreciation charges of an airline
d. Utility charges that include a minimum-use fee, for a small business
 e. Annual business licensing fee paid by a daycare center
f. Truck fuel consumed by a road construction company

Required:
Classify each of these costs as variable, committed fixed, discretionary fixed, or
semivariable.

4. Which of the following costs are variable, fixed, or mixed costs?

Units of Output 20,000 Units 35,000 Units

Direct materials ₱ 120,000 ₱ 210,000
Workers' wages 400,000 700,000
Supervisors' salaries 250,000 250,000
Equipment depreciation 80,000 80,000
Maintenance 65,280 88,320
Utilities 345,600 475,200
Total ₱1,260,880 ₱1,803,520

5. A company wants to analyze its cost behavior. It has determined that machine hours
best explain the company's utilities cost. The company's relevant range of activity
varies from a low of 600 machine hours to a high of 1,100 machine hours, with the
following data being available for the first seven months of the year:

Month Utilities Machine

Hours
January ₱8,700 800
February 3,050 300
March 8,950 810
April 9,360 920
May 9,625 950
June 9,150 900
July 8,360 720

Required:
1. Using the high and low points method, develop the cost formula for the
company’s utility costs.

2. Using the method of least squares, develop the cost formula for the
company’s utility costs.

6. The method of least squares was used to develop a cost equation to predict the
cost of maintenance. Monthly data for the past four years were used for the
regression.

The following computer output was received:

Intercept ₱4,000
Slope 15
Coefficient of correlation 0.94

The driver used was “number of maintenance hours.”

Required:
1. What is the cost formula?
2. Using the cost formula, predict the cost of maintenance if 420
maintenance hours are to be worked next month.
3. What percentage of the variability in maintenance cost is explained by
number of maintenance hours? Do you think the equation will predict
well? Why or why not?
4. Using the results from the regression equation, predict the cost of
maintenance for next year if 6,000 maintenance hours are
predicted.

7. Mina Corporation extracts ore for eight different companies in Benguet. The firm
anticipates variable costs of ₱65 per ton along with annual fixed overhead of
₱840,000, which is incurred evenly throughout the year. These costs exclude the
 following semivariable costs, which are expected to total the amounts shown for
the high and low points of ore extraction activity:

March (85tons) ₱39,900

August (1,300tons) ₱46,200

Mina uses the high-low method to analyze cost

behavior.

REQUIRED:
A. Calculate the semivariable cost for an upcoming month when 875 tons
will be extracted.
B. Calculate the total cost for that same month.
C. Mina uses Cortez Trucking to haul extracted ore. Cortez's monthly
charges are as follows:
800 – 1,099 tons ₱ 70,000
1,100 – 1,399 tons 90,000
1,400+ tons 110,000

1. From a cost behavior perspective, what type of cost is this?

2. If Mina plans to extract 875 tons, is the company being very "cost
effective" with respect to Cortez's billing rates? Briefly discuss.

8. Theena Company wants to determine the factors that are associated with
overhead. The controller for Theena constructed a multiple regression equation
using the following independent variables: direct labor hours, number of setups,
and number of purchase orders. The analysis was run using the past 30 months
of data. From the printout, the following data were obtained:

Parameter Estimate
Intercept ₱50,000
Rates of variability:
Direct labor hours (H) ₱ 10
Number of setups (S) ₱200
Number of purchase orders (P) ₱
50 Number of observations (n) 30

r2 = 0.95

REQUIRED:
1. Write out the cost formula for monthly overhead for Theena Company.
2. If Theena budgets the following for next month, what is the budgeted
overhead cost?
 Direct labor hours 300
 Number of setups 40
 Number of purchase orders90

3. Suppose that Theena’s engineers expect the number of purchase orders

to increase by 20 percent. How much additional overhead cost would be
incurred for the following month?

9. The chief statistician of Xander Company has developed the following cost
formula:

Y = ₱200,000+ 5L + 20M

Where: Y = total monthly manufacturing overhead cost

L = labor hours
M = machine hours

The measure of goodness of fit is good and no evidence of multicolinearity

exists. The company will use 5,000 labor hours and 3,000 machine hours next
month.
REQUIRED:
1. Determine the total manufacturing overhead costs that Xander Company
should incur next month.
2. Xander makes a product that has ₱50 in materials costs. It requires four
hours of labor time and 2 hours of machine time. Laborers earn ₱80 per
hour. What is the product’s per unit variable manufacturing cost?
3. Suppose that Xander Company could reduce the labor time for the product
described in requirement 2 by 50%. Machine time will remain the same. By
how much would the per unit variable manufacturing cost fall?