CHAPTER 1: INTRODUCTION TO Decision Making - The process of

MANAGERIAL ACCOUNTING choosing among competing alternatives

is called decision making.
Managerial accounting
- Alternative means giving the
- is providing accounting
highest benefit/ Increasing the
information for a company’s
Wealth of the owners.
internal users. (Owners,
Employees, and people who will Financial Accounting and Managerial
be affected by the company Accounting
closing.
• Financial Accounting provides
- Is not bound by generally
information for external users:
accepted accounting principles
(GAAP). (meaning not required to o Investors, creditors,
follow the GAAP) customers, suppliers,
government agencies, and
Managerial accounting has three broad
labor unions.
objectives: MANAGERS DO THIS
• Financial accounting is historical:
1. To provide information for planning
the organization’s actions. o Investment decisions,
2. To provide information for stewardship evaluation,
controlling the organization’s monitoring activity, and
actions. regulatory measures.
3. To provide information for making
Financial Accounting and Managerial
effective decisions
Accounting (cont.)
Planning - The detailed formulation of
• Financial statements must follow
action to achieve a particular end is the
rules defined by:
management activity called planning.
o Securities and Exchange
Controlling - The managerial activity of Commission (SEC)
monitoring a plan’s implementation and
o Financial Accounting
taking corrective action as needed is
Standards Board (FASB)
controlling.
o International Accounting
Standards Board (IASB)

• Managerial Accounting produces

information for internal users,
such as managers, executives, and
workers.
 Total Quality Management (TQM)

• Continuous Improvement: The

ongoing search for ways to boost
overall efficiency and productivity
by:

o Reducing waste

NOTE: o Increasing quality

- PH is part of the IFA (Institute of o Managing costs

Financial Accountants) and They → This process is fundamental to
must follow the required establishing excellence.
requirements.
- General purposes – F.A • TQM Philosophy:
- Specific Purposes – M.A o Aims to create an
Strategic Positioning environment where workers
produce perfect (zero-
Effective cost information can help defect) products.
increase customer value through two
main strategies: o Has led to a need for
managerial accounting
• Cost Leadership: Delivering the systems that deliver
same or superior value at a lower information about product
cost than competitors. quality.
• Differentiation (Superior • Companies attempt to increase
Products): Enhancing value by organizational value by
offering something unique that eliminating wasteful activities
competitors don’t. throughout the value chain.
Value Chain - Achieving cost leadership • This has led to a shift toward lean
and differentiation involves mastering the accounting, which:
value chain:
o Organizes costs according
• A value chain is the set of to the value chain
activities required to:
o Collects both financial and
nonfinancial information

Enterprise Risk Management (ERM)

 • Managerial accountants now help o The treasurer focuses on
implement a company’s ERM the finance function.
approach.
Managerial Accounting and Ethical
• ERM is a formal system for: Conduct

o Identifying key threats and • The goal of profit maximization

opportunities must be bounded by legality and
ethics.
o Strategically responding to
them to support long-term • Ethical behavior means taking
business health actions that are right, proper, and
just.
Role of Managerial Accountants
• Behavior can be:
• The role of managerial
accountants is primarily o Right or wrong
supportive.
o Proper or improper
• They assist individuals responsible
o Fair or unfair
for executing an organization's
core objectives. • Companies aiming for long-term
success often find that honesty
• Line positions refer to roles with
and loyalty toward stakeholders
direct responsibility for these
pays off.
objectives.
Certification
Staff Positions and Key Roles
Managerial accountants may pursue
• Staff positions support the
various certifications to demonstrate their
organization indirectly and are not
professional competence. The major
involved in its primary objectives.
types include:
• The controller oversees all
• Certificate in Management
accounting functions and reports
Accounting (CMA) –
to:
RECOGNIZED INTERNATIONAL
o The general manager
• Certificate in Public Accounting
o The chief operating officer (CPA) PH LANG RECOG

• In larger organizations, the • Certificate in Internal Auditing

controller and treasurer operate (CIA)
separately.
Cost Behavior • Identifying and managing drivers
helps managers predict and
Basics of Cost Behavior
control costs.
• Cost behavior is the foundation
• Example: Weather is a significant
upon which managerial
cost driver in the airline industry.
accounting is built.
Relevant Range and Cost Relationships
• It describes whether a cost
changes when the level of output • The relevant range refers to the
changes. output range over which a cost
relationship remains valid for
• Costs can be variable, fixed, or
normal business operations.
mixed.
• It limits the cost relationship to
• A fixed cost does not change in
expected operational levels.
total as output changes.
• A graph illustrates this range,
Basics of Cost Behavior (continued)
allowing managers to assume a
• A variable cost increases in total linear cost relationship within it.
when output increases, and
Fixed Costs
decreases in total when output
decreases. • Fixed costs are costs that in total
are constant within the relevant
• Knowing how costs change with
range as the level of output
output is essential to planning,
increases or decreases.
controlling, and decision-
making. • In this example of Colley
Computers, notice while the total
Measures of Output and the Relevant
fixed cost of supervision remains
Range
the same, the unit cost
• Fixed and variable costs only make decreases as more computers are
sense when tied to an output produced.
measure.
• The number of computers
• A cost driver is a causal factor that produced is called the output
measures the output of the activity measure, or driver.
that leads (or causes) costs to
• Even though fixed costs may
change.
change, this does not make them
variable.
 • They are fixed at a new higher (or he Reasonableness of Straight-Line
lower) rate. Cost Relationships

• A graph of Colley's fixed Be Cautious When Output Is Outside

supervision costs is shown below. Relevant Range

Discretionary vs. Committed Fixed • Cost behavior assumptions may

Costs not hold when output strays from
the company’s normal operating
Types of Fixed Costs
range.
• Discretionary Fixed Costs: Can
• Even if costs appear to follow a
be changed or avoided easily at
straight-line trend within the
management’s discretion.
relevant range, they may actually
• Committed Fixed Costs: Cannot be semi-variable.
be changed easily; tied to longer-
Example of Cost Efficiency at Scale
term obligations or essential
operations. • At very low output levels, workers
may use more materials or
Examples
require more time per unit.
• Advertising → Discretionary (It’s
• As output increases, workers
flexible—management decides
often improve efficiency:
when and how much to spend.)
o Learn faster techniques
• Lease Cost → Committed (It’s
locked in—usually bound by o Use materials more wisely
contracts that span years.)
• Result: Variable cost per unit
Variable Costs decreases with scale.

• Variable costs are costs that vary Mixed Costs

in direct proportion to changes in
• Mixed costs include both fixed
output within the relevant range.
and variable components.
• They can also be represented
• Example: Company overhead may
using a linear equation.
involve a fixed supervisor salary
• Total variable costs depend on the and variable supply costs
level of output. depending on output quantity.

• This relationship can be described • Mixed costs can be illustrated

through equations or graphs. using formulas and graphs.
Mixed Costs (cont.) Accounting Records and the Need for
Cost Separation
• Total Cost = Total Fixed Cost +
Total Variable Cost When is Cost Separation Worthwhile?

Step Costs: Narrow Steps • A formal effort is required to

classify all costs correctly into
• Step costs (also called semi-fixed
fixed, variable, or mixed
costs) remain constant for a
categories.
specific range of output.
• If mixed costs form only a small
• When output increases beyond
portion of total costs, doing so
that range, the cost jumps to a
may not be worth the effort.
higher level and stays constant
again until the next jump. Handling Mixed Costs

• This pattern results in a • Mixed costs can sometimes be

discontinuous cost function. placed into either category (fixed
or variable) without significant
Step Costs: Wide Steps
impact.
• Step costs with wide intervals are
• Dividing mixed costs into both
more similar to fixed costs.
categories is rarely done and
• These costs remain constant over generally not a good option.
a broad range of output.
• If mixed costs are a large portion
• When output exceeds that range, of total expenses, cost separation
the cost jumps sharply to the next becomes necessary.
level.
Separating Mixed Costs into Fixed and
Example Variable

• Suppose a company leases Three Methods

machinery that can only produce
• High-Low Method
1,000 units.
• Scattergraph Method
• If output needs grow, the company
must lease additional machines. • Method of Least Squares

• Each added machine supports All methods assume a linear cost

another 1,000 units, creating relationship for simplicity.
distinct cost jumps—not a
smooth rise.
Cost Equation Format costs into their fixed and variable
components using just the highest
• Total Cost = Fixed Cost +
and lowest activity data points.
(Variable Rate × Output)
• To demonstrate, data from
In this setup:
materials handling costs at
• Total Cost is the dependent Anderson Company will be used.
variable—its value relies on
changes in output.

• This framework helps predict cost

behavior within the relevant range.

Methods for Separating Mixed Costs

into Fixed, Variable Components (cont.)

• The independent variable

measures output and explains
changes in the cost (or other
dependent variable).

o A good independent
variable is one that causes
or is closely associated
Scattergraph Method
with the dependent
variable. • The scattergraph method is a way
to see the cost relationship by
o Many managers refer to an
plotting data points on a graph.
independent variable as a
cost driver. The Method of Least Squares

• The intercept corresponds to • A statistical technique to find the

fixed cost. best-fitting line through a set of
data points.
• The slope of the cost line
corresponds to the variable rate. • It consistently produces the same
cost formula for a given dataset.
The High-Low Method
• The "best-fitting line" is defined as
• Given two points, the slope and
the one with data points closest
the intercept can be determined.
to it compared to any other
• The high-low method is a possible line.
technique for separating mixed
 Line Deviations Managerial Judgment in Cost
Estimation
• The regression line better reflects
the data pattern than other lines. • Considered the most widely used
method in practice.
• This is because its squared
deviations from actual data points • Relies on managers’ experience
are smaller overall. and intuition to identify fixed and
variable costs.
• It minimizes prediction errors—
the gap between predicted costs • Doesn’t require technical
on the line and actual costs from calculations—just a seasoned eye.
data.
• Judgment can take different forms:
Why Understanding Cost Behavior
o Some managers simply
Matters
categorize costs as fixed or
• Cost behavior—how costs shift as variable and ignore mixed
output changes—is key for ones.
planning, controlling, and
o Others recognize mixed
making informed decisions.
costs and estimate their
• Mixed costs can be tricky, since fixed/variable portions
they blend fixed and variable through reasoning or
parts. pattern recognition.

• Each method (Scattergraph, High- Refining Cost Estimation with

Low, Least Squares) helps Judgment
untangle these components,
Slide 1 – Enhancing Statistical
giving managers clarity on how
Results:
costs behave.
• Managers may use experience
and intuition to refine results from
statistical methods.

• A seasoned eye might “eyeball”

the data, exclude outliers, or
adjust projections to account for
changes (like tech shifts or
restructuring).

Slide 2 – Pros and Cons of

Judgment-Based Estimation:
• Advantage: Simplicity—fast and
human.

• Powerful when paired with deep

understanding of company
patterns.

• Risk: If judgment is flawed or

biased, errors creep in.

Ethical Decisions in Cost Estimation

• When managers use judgment to

identify fixed and variable costs,
they aren’t just crunching data—
they're making choices that ripple
outward.

• Decisions like changing suppliers,

adjusting production, or laying off
workers hinge on cost behavior
analysis.

• Ethical managers recognize this

and commit to having the best
possible information before
acting—balancing efficiency with
empathy.