CHAPTER 1

Decentralization
- Delegation of decision-making authority throughout an organization by giving managers the authority to make
decisions relating to their area of responsibility.
Line positions
Staff positions
- Directly related to achievement of the basic
- Support and assist line positions
objectives of an organization.
Process Management
The push approach
- Production first before orders
- Results in large inventories of raw materials, work in process, and finished goods.
Lean Thinking Model
Identify the value to customers in specific products and
services.
Identify the business process that delivers this value.
Organize work arrangements around the flow of the
business process through a manufacturing cell.

Create a pull system where production is not initiated

until a customer has ordered a product, also known as
just-in-time (JIT) production.
Pursue perfection in the business process.

Supply chain management

- Refers to the coordination of business processes across companies to better serve end consumers.
Theory of Constraints
- A constraint or bottleneck is anything that prevents you from getting more of what you want.
- The constraint in a system is determined by the step that has the least capacity.
- Based on the insight that effectively managing the constraint is the key to success.
- Manage the constraint with the intent of generating more business rather than cutting the workforce.
The Theory of Constraints approach to process improvement involves four steps:
Identify the weakest link in the chain which is the
Concentrate improvement efforts on strengthening the
constraint.
weakest link.
Do not place a greater strain on the system than the
If the improvement efforts are successful, the weakest
weakest link can handle if you do, the chain will break.
link will improve to the point that it is no longer the weakest
link. Process starts all over again.
Six Sigma (zero defects)
- A process improvement method that relies on customer feedback and fact-based data gathering and analysis
techniques to drive process improvement.
Ethics in Business
IMA Guidelines for Ethical Behavior
Management accountants must:
Competence

Maintain 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 judgment.

Confidentiality

Not disclose confidential information unless legally obligated to do so.

Ensure that subordinates do not disclose confidential information.

Not use confidential information for unethical or illegal advantage.

Integrity

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.

Credibility

Communicate information fairly and objectively.

Disclose all relevant information that could influence a users understanding of reports and recommendations.

Disclose delays or deficiencies in information timeliness, processing, or internal controls.

IMA Guidelines for Resolution of an Ethical Conflict
Follow employers established policies.

For an unresolved ethical conflict:

Discuss the conflict with next highest uninvolved manager.
If immediate supervisor is the CEO, consider the board of directors or the audit committee.
Contact with levels above the immediate supervisor should only be initiated with the supervisors
knowledge, assuming the supervisor is not involved.
Except where legally prescribed, maintain confidentiality.
Clarify issues in a confidential discussion with an objective advisor.
Consult an attorney as to legal obligations.
Why have ethical standards?
- If the standards are not followed in business, then the economy, and all of us, would suffer.
- Abandoning ethical standards would lead to a lower standard of living with lower-quality goods and services, less
to choose from, and higher prices.
The Code of Ethics for Professional Accountants
- Issued by the International Federation of Accountants (IFAC) governs the activities of all professional accountants
throughout the world.
- IFACs code also outlines the accountants ethical responsibilities in matters relating to:

Taxes,

Advertising and solicitation,

Independence,

Handling of monies

Fees and commissions,

Cross-border activities.
Corporate governance
- System by which a company is directed and controlled.
- Provide incentives for the board of directors and top management to pursue objectives that are in the interests of
the company.
- Provide effective monitoring of performance.
The Sarbanes-Oxley Act of 2002
- Was intended to protect the interests of those who invest in publicly traded companies by improving the reliability
and accuracy of corporate financial reports and disclosures.
- Six key aspects of the legislation:
CEO and CFO should certify in writing that their
The public companys independent auditor should issue
companys financial statements and disclosures fairly
an opinion on the effectiveness of the companys internal
represent the results of operations.
control over financial reporting to accompany
Public Company Accounting Oversight Board will
managements assessment, and both are included in the
provide additional oversight of the audit profession.
companys annual report.
The power to hire, compensate, and terminate public
The Act establishes severe penalties for certain
accounting firms is in the hands of the audit committee.
behaviors, such as:
The Act places restrictions on audit firms, such as
Altering or destroying any documents that may
prohibiting public accounting firms from providing a variety
eventually be used in an official proceeding.
of non-audit services to an audit client.
Retaliating against a whistle blower.
Enterprise risk management
- Process used by a company to proactively identify the risks that it faces and manage those risks.

- Most common tactic is to reduce risks by implementing specific controls.

Corporate social responsibility (CSR)
A concept whereby organizations consider the needs of all stakeholders when making decisions.
- CSR extends beyond legal compliance to include voluntary actions that satisfy stakeholder expectations.
Certified Management Accountant (CMA)
- A management accountant who has the necessary qualifications and who passes a rigorous professional exam.
CHAPTER 2
Work of Management
Planning
- Identify alternatives
- Select best alternatives to further objectives
Directing and Motivating
- Day-to-day activities
- Employee work assignments, effective
communications, etc.
Controlling
- Ensures plans are followed
- Feedback through performance reports

Develop budgets achieve selected alternative

Formulate long and short-term plans

Implement plans

Measure performance
Comparing actuality to plans

Comparison of Financial and Managerial Accounting

Financial
Managerial
External persons
Users
Managers
Historical
Time Focus
Future
Verifiability
VS
Relevance
Precision
VS
Timeliness
Whole org
Subject
Segments of org
Mandatory
Requirement Not mandatory
Manufacturing Costs
Direct Materials
- Raw materials that become an integral part of the
product and that can be conveniently traced
directly to it
Direct Labor
- Those labor costs can be easily traced to
individual units of the product
Product Costs Versus Period Costs
Product costs
- Include direct materials, direct labor and
manufacturing overhead.
Classification of Costs
Direct
Material
s

Direct
Labor

Prime
Cost

Manufacturing
Overhead

Conversion
Cost

Manufacturing Overhead
- Manufacturing costs that cannot be traced directly
to specific units produced
Nonmanufacturing Costs
- Selling Costs: Costs necessary to secure the order
and deliver the product
- Administrative Costs: All executive, organizational
and clerical costs
Period costs
- Include all selling costs and administrative costs.

Balance Sheet
Merchandiser
Current Assets
Cash
Receivables
Merchandise Inventory

Manufacturer
Current Assets
Cash
Receivables
Inventories
Raw Materials
Work in Process
Finished Goods

Raw materials are the materials used to make the product.

Work in process consists of units of product that are partially complete, but will require further work to be saleable to
customers.
Finished goods consist of units of product that have been completed, but not yet sold to customers.
Income Statement
Basic Equation for Inventory Accounts
Beginning + Additions
= Ending + Withdrawals
Balance
to inventory
Balance
from inventory

Cost Classifications for Predicting Cost Behavior

Cost Behavior
- How a cost will react to changes in the level of
activity within the relevant range
Cost
In Total
Per Unit
Variable
In proportion
Constant
Fixed
Constant
Inversely

Cost of Goods Sold

Beg Finished + Cost of goods = End finished + Cost of
Goods inventory manufactured goods inventory goods sold

Cost Classifications for Assigning Cost to Cost Objects

Direct Costs
Costs that can be easily
and conveniently traced to a
unit of product or other cost
object.
Ex: Direct materials and
direct labor

Indirect Costs
Costs that cannot be easily
and conveniently traced to a
unit of product or other cost
object.
Ex: Manufacturing overhead

Cost Classifications Used in Making Decisions

Only those costs and benefits that differ between alternatives are relevant in a decision. All other costs and
benefits can and should be ignored.
Differential costs (or incremental costs)
- Difference in cost between any two alternatives.
- Can be either fixed or variable.
- A difference in revenue between two alternatives is called differential revenue.
Opportunity cost
- Potential benefit that is given up when one alternative is selected over another.
Sunk cost
- A cost that has already been incurred and that cannot be changed by any decision made now or in the future.
- Cannot be differential costs, therefore ignored in decision making.
CHAPTER 3
Cost Systems
Process Costing
- Best used by companies producing many units of a single product
- One unit of output is indistinguishable from any other unit of output.
Job-order Costing
- Many different products are produced each period.
- The products are usually manufactured to customers specifications and are unique in nature.
Documents used:
Measuring Direct Materials Cost
- Bill of materials: document that lists the type and quantity of each type of direct material needed to complete a
product.
- Materials requisite form: specifies the type and quantity of materials to be drawn from the storeroom and identifies
the job that will be charged for the cost of materials.
Job Cost Sheet
- Records the materials, labor and manufacturing overhead costs charged to the job.
Measuring Direct Labor Cost
- Time ticket: an hour-by-hour summary of the employees activities throughout the day.

Predetermined manufacturing overhead rate

Manufacturing overhead
- Applied to all jobs that are in process. We apply overhead using a base we believe causes overhead costs to be
incurred.
We must use an allocation base because:
- It is difficult, if not impossible, to actually trace overhead costs to a particular job.
- Manufacturing overhead also includes a number of different costs and it would be very difficult to gather all of
them together in time to charge them to a particular job.
- Many types of overhead are fixed in nature even though output fluctuates during the period.
Predetermined overhead rate (POHR)
- Used to apply overhead to jobs; determined before the period begins

POHR

Estimated total manufacturing

overhead cost for the coming period
Estimated total units in the
allocation base for the coming period

Overhead applied = POHR x Actual activity

Normal cost system
- Applies overhead to jobs by multiplying a POHR by the actual amount of the allocation base incurred by the jobs.
Cost driver
- A factor, such as machine-hours, flight hours, that causes overhead costs.
Cost of Goods Manufactured Schedule
Direct Materials
Beginning raw materials inventory
Add: Purchases of raw materials
Raw materials available for use
Deduct: Ending raw materials inventory
Raw materials used in production
Direct Labor
Manufacturing Overhead
Total Manufacturing cost
Add: Beginning work in process inventory
Deduct: Ending work in process inventory
Cost of goods manufactured

Cost of Goods Sold Schedule

Finished goods inventory, beginning
Add: Cost of goods manufactured
Goods available for sale
Deduct: Finished goods, inventory ending
Unadjusted cost of goods sold
Add: Underapplied (or Deduct: Overapplied) overhead
Adjusted cost of goods sold
Functional-form Income Statement
Sales
Cost of goods sold
Gross margin
Selling and Administrative expenses:
Salaries expense
Depreciation expense
Advertising expense
Other expense
Net operating income

Underapplied or overapplied overhead

- Difference between the overhead cost applied to Work in Process and the actual overhead costs
Summary of Overhead Concept
At the beginning of the period:
Estimated total
Estimated total
manufacturing / amount of the
overhead cost
allocation base

Predetermined
overhead rate

During the period:

Predetermined
Actual amount of
Total
overhead rate
X the allocation base
= manufacturing
incurred during the
overhead
period
applied
At the end of the period:
Actual total
Total
Underapplied
manufacturing _ manufacturing
= (overhead)
overhead cost
overhead applied
overhead
CHAPTER 5
Cost Behavior and Analysis
Activity base (cost driver)
- A measure of what causes the incurrence of variable costs.
- As the level of the activity base increases, the total variable cost increases proportionally.
Variable Costs
- Total amount varies in direct proportion to changes in activity level
- Remains constant in a per unit basis
- The proportion of variable costs differs across organizations
True Variable Cost
- Amount used during the period that varies in direct proportion to the activity level.
Step-Variable Cost
- A resource that is obtainable only in large chucks.
- Changes only in response to fairly wide changes in activity.
Linearity Assumption
- Economists correctly point out that many costs which accountants classify as variable costs actually behave in a
curvilinear fashion.
- Nonetheless, within a narrow band of activity known as the relevant range, a curvilinear cost can be suitably
approximated by a straight line.
Relevant range
- Range of activity within which the assumptions made about cost behavior are valid.
Fixed Cost
- Total amount remains constant within the relevant range
- Decreases on a per unit basis as the activity level increases
- The trend in many industries is toward greater fixed costs relative to variable costs.
Types of Fixed Costs
Committed
- Long-term, cannot be significantly reduced in the
short term.

Discretionary
- May be altered in the short-term by current
managerial decisions
- Arise from annual decisions by management

Fixed Costs and the Relevant Range

- The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is flat.
- Step fashion
Differences from Step-Variable
- First, step-variable costs can often be adjusted quickly as conditions change, whereas fixed costs cannot be
changed easily.
- The second difference is that the width of the steps for fixed costs is wider than the width of the steps for stepvariable costs.

Mixed costs (also called semivariable costs)

- Contain both variable and fixed cost elements.
- Fixed portion is constant regardless of kilowatt hours consumed. This cost represents the minimum cost that is
incurred to have the service ready and available for use.
- Variable portion varies in direct proportion to the activity.
Y = a + bX.
Y = the total mixed cost
a = the total fixed cost (vertical intercept of the line)
b = the variable cost per unit of activity (slope of the line)
X = the actual level of activity.
Analysis of Mixed Costs
Account analysis
- An account is classified as variable and fixed based on the analysts prior knowledge about how costs behave.
Engineering approach
- Classifies costs based upon an industrial engineers evaluation of production methods, materials specifications,
labor requirements, equipment usage, power consumption, and so on.
High-Low Method
1. Choose the data points pertaining to the highest and
lowest activity levels.
2. Determine the total costs associated with the two
chosen points.
3. Calculate change in cost between the two data points.
4. Take the total cost at either activity level.
Total Fixed Cost = Total Cost Total Variable Cost
5. Construct an equation that can be used to estimate the
total cost at any activity level.
Y = Total Fixed Cost + Variable Cost per Unit(X)

Least Squares Regression Method

- A method used to analyze mixed costs if a scatter
graph plot reveals an approximately linear
relationship between the X and Y variables.
- This method uses all of the data points to estimate
the fixed and variable cost components of a mixed
cost.
- The cost analysis objective is: Y = a + bX
2
- R is the percentage of the variation in the
dependent variable (total cost) that is explained by
variation in the independent variable (activity).

Contribution Format Income Statement

Sales
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Net operating income
CHAPTER 6
Contribution income statement
- Helpful to managers in judging the impact on profits of changes in selling price, cost, or volume.
Contribution margin
- Defined as the amount remaining from sales revenue after variable expenses have been deducted.
- Used to cover fixed expenses.
- Remaining CM contributes to net operating income.
CVP in Equation Form
Profit = (Sales Variable expenses) Fixed expenses
Unit CM = Selling price/unit Variable expenses/unit
Profit = (P Q V Q) Fixed expenses
Profit = (P V) Q Fixed expenses
Profit = Unit CM Q Fixed expenses

CVP in Graphic Form

- Unit volume is usually represented on the X-axis
and dollars on the Y-axis.
Break-even point
- Where the total revenue and total expenses lines
intersect.

Contribution margin ratio

CM Ratio = Total CM
Total Sales

CM Ratio = CM per unit

SP per unit

Target Profit Analysis

- We estimate what sales volume is needed to achieve a specific target profit
Equation Method
Formula Method
Unit Sales
Unit sales to attain target profit = Target profit + Fixed expenses
Profit = Unit CM Q Fixed expenses
Unit CM
Dollar Sales
Dollar sales to attain target profit = Target profit + Fixed expenses
Profit = CM ratio x Sales Fixed expenses
CM Ratio

Break-even Analysis
Unit sales to break even = Fixed expenses
Unit CM
Dollar sales to break even = Fixed expenses
CM Ratio

Operating Leverage
- Operating leverage is a measure of how sensitive net
operating income is to percentage changes in sales.
Degree of operating leverage = Contribution Margin
Net operating income

Margin of Safety
- Amount by which sales can drop before losses are incurred.
Margin of safety = Total sales - Break-even sales
Margin of safety percentage = Margin of safety in dollars
Total actual sales in dollars
Sales mix
- The relative proportion in which a companys products are sold.
CHAPTER 11
Standard Costing
Standard
- Benchmark or norm for measuring performance
Quality standards
- How much of an input should be used to make a product or provide a service.
Price standards
- How much should be paid for each input of the unit.
Management by exception
- Managers investigate the discrepancy to find the cause of the problem and eliminate it.
Standard cost card
- Shows the standard quantities and costs of the inputs required to produce a unit of a specific product.
Ideal standards
Attained under best
circumstances
No machine breakdowns, or
any work interruptions
Most skilled employees
working 100% of the time

Practical standards
tight but attainable
Allow normal machine
downtime, rest periods
Reasonable though efficient
efforts by average workers

Direct materials standards

Standard price per unit
- Should reflect final, delivered out cost of the
materials, net of any discounts taken

Standard quantity per unit

- Should reflect the amount of material required for
each unit of finished product as well as an
allowance for unavoidable waste

Direct labor standards

Standard rate per hour
- Includes wages, employment taxes, and fringe
benefits.

Standard hours per unit

- Direct labor time needed to complete a product

Direct materials variances

Materials price variance = AQ (AP SP)
Materials quantity variance = SP (AQ SQ)

Direct labor variances

Labor rate variance = AH (AR SR)
Labor efficiency variance = SR (AH SH)

Variable manufacturing overhead variances

Variable overhead rate variance = AH (AR SR)
Variable overhead efficiency variance = SR (AH SH)
CHAPTER 12
Responsibility Center
- Any part of an organization whose manager has control over cost, profit and investment centers.
Cost Center
- Has control over costs, but not over revenue or use of investment funds.
Profit Center
- Has control over both costs and revenues, but no control or investment funds.
Investment Center
- Has control over costs, revenue and investments in operating assets.
Segment Reporting
Segment
- Any part or activity of an organization about which a manager seeks cost, revenue, or profit data.
Segment margin
- Computed by subtracting the traceable fixed costs of a segment from its contribution margin.
- best gauge of the long-run profitability of a segment
Traceable costs
Common costs
- Arise because of the existence of a particular
- Arise because of the overall operation of company;
segment and would disappear over time if the
would not disappear if any segment were eliminated.
segment itself disappeared.
- May make a profitable business segment appear to
be unprofitable.
Return on Investment (ROI)
ROI =

Net operating income

Average operating assets

Margin = Net operating income

Sales
Ways to increase ROI:
- Increase sales
- Reduce operating expenses
- Reduce operating assets

Turnover =

Sales
Average operating assets

ROI = Margin x Turnover

Residual Income
- Net operating income earned above minimum required return on its operating assets
Residual
Income

Net operating
income

Average
operating assets

Minimum required
rate of return

Transfer pricing
Transfer price
- The price charged when one segment of a company provides goods or services to another segment of the
company.
Transfer Variable cost + Total contribution margin on lost sales
Price
per unit
Number of units transferred
Transfer Price Cost of buying from outside supplier
CHAPTER 13
Cost Concepts for Decision Making
Relevant Costs
- Differ between alternatives
- Avoidable Cost: eliminated in choosing alternatives
- Also called differential or incremental cost

Irrelevant Costs (Unavoidable Costs)

- Sunk Costs: already incurred and cannot be avoided
- Future costs that do not differ between alternatives

Relevant Cost Analysis: Two-Step Process

1. Eliminate costs that do not differ between alternatives
2. Use the costs that differ between alternatives in making the decision.
Drop or continue a product line or segment
Contribution margin approach:
Solution:
CM lost if product line is dropped
Less fixed costs that can be avoided
Net advantage/disadvantage

Make or buy analysis

Make or buy
- A decision to carry out one of the activities in the
value chain internally, rather than to buy externally
from a supplier.
Opportunity cost
- The benefit that is foregone as a result of pursuing
some course of action.

Accept or reject a special order

Special order
- A one-time order that is not considered part of the
companys normal ongoing business.
- Incremental costs and benefits are relevant.

Utilization of constrained resource

When a constraint exists, a company should select a
product mix that maximizes the total contribution
margin earned since fixed costs usually remain
unchanged.
A company should not necessarily promote those
products that have the highest unit contribution
margin.
Rather, it should promote those products that earn
the highest contribution margin in relation to the
constraining resource.

Sell as is or process further

Two or more products produced from a common
input are called joint products.
The point in the manufacturing process where each
joint product can be recognized as a separate
product is called the split-off point.