# Managerial Accounting and control Dr.

Mohamed Youssef Lecture 1

Managerial Accounting and Control
Chapter 2: Introduction to cost Behavior and cost – Volume Relationships Monetary measure of a resource used or forgone to a chive a specific object

Cost Concept:

Resources like (row material, Labor, other cost items) Example: If we purchase 1000 KG of row materials and the unit price is \$5 / KG Monetary measure (what we spend to purchase) Monetary measure used (in Factory)

1000 x \$ 5 = \$ 5000 300 x \$5 = \$1500

We purchase \$5000 our store room it consider (Inventory) or current assets used \$1500 to be used by Manufacturing activities this \$ 1500 divided to two parts \$1400 actual monetary benefit and \$100 waste Example: Row material, begin inventory \$ 3000 remaining from year 2003 (current assets) during 2004 we purchase \$ 7000 total amount of R.M available for use is \$ 10000

• R.M used \$8500 • How much we consume during this year 2004 \$ 1500 (Ending Inventory) Kind of Resources: R.M: Row Material L.C: Labor Cost O.H: Over Head Example: Cost Object: Example: working hours 7000 H but this is not consider cost, but cost by wage \$3 so labor cost equal to 7000 H x \$3 Objectives of accumulation and allocations of cost items In our factory we have R.M: \$15000 L.C: \$7000 O.H: \$8000 T.C: \$30000

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Managerial Accounting and control Dr. Mohamed Youssef Lecture 1 From this example we can find that there are 3 factories can affect the cost objectives, this three factories are cost of unit, cost per dept., cost per Brach Cost Drive: Any factor affecting cost (Output measures of resources and activities are called cost drivers) Examples: cost per unit \$ 8 Volume of activities Row Material( D.M) Unit cost 1 8 \$ 10 80 \$ 50 400\$ 100 800\$ Labor cost L.C: 1500 2000 Cost Behavior: Example: wage rate \$5 \$5 x x x No. of hours 300 H 400 H

It is how costs are related to and affected by the activities of an organization Supervisory salaries for each 10 employs required 1 supervisor Cost 6000

From this example we can see that The supervisory salaries cast changes 4000 With the change of number Of employs 2000 And this graph called cost Behavior. 10 20 30 Empl.

Note: If we select the most proper cost Drive, manager can understand cost behavior and how well costs are controlled Examples: AZZ 3000 worker L.C < Helwan 19800 worker L.C

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Managerial Accounting and control Dr. Mohamed Youssef Lecture 1 May be 40 % from cost L.C and 60 % Social Benefit, from here we can consider number of worker is cost drive and this cost drive can change L.C

Total Cost: divided to 3 groups
• • • Variable costs (chapter 2) Mixed costs (chapter 3) Fixed costs (chapter 2) Is a cost that changes in direct proportion to changes in the cost driver Cost per unit of D.M. = \$6 Volume 1 2 4 100 1000 0 Can be represented by this figure This static Liner but we have In a minor cases no liner cost \$ % Total V.C 6 12 24 600 6000 0 = Cost per unit (CPU) 6 6 6 6 6 0

Variable Cost:

Example:

V.C

\$6

V.CPU

VOL Note: Example: D.M D.L Total To make prediction for future we must use unit cost price unit price \$7

2003(1000U)
\$7000 \$3000 \$10000

2004(2000 U) \$14000 \$6000 \$20000

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Managerial Accounting and control Dr. Mohamed Youssef Lecture 1 Example: if cost for unit price changed to be (R.M.+10%) and wage price changed to be (wage –5%)

2004(2000U)
D.M D.L Total Fixed Cost: Example: (7+7x.1) x 2000= (3-3x.05) x 2000= = 15400 5700 21100

Is not immediately affected by changes in the cost driver. For example (salary, rent, depreciation) Total rent = \$1000 Volume 1 2 4 100 1000 0 % Total F.C 1000 1000 1000 1000 1000 1000 = Fixed (CPU) 1000 500 250 10 1 Φ

Max

Min

Note:

To make prediction for future we must use total fixed cost

Can be represented by this figure \$

\$1000 F.Cpu

Total F.C

VOL Example: Total rent = \$3000 2003(1000) 2004(2000 U) D.M \$5 Rent \$3 Total \$8 / u

\$5 \$1.5 \$6.5/u

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Managerial Accounting and control Dr. Mohamed Youssef Example: Lecture 1 if rent cost changed by \$500 and D.M changed by 10%

2004(2000U)
D.M Rent Total Example: Total V.C Total F.C Total Cost V.Cpu F.Cpu Total cost / U 1000 U 4000 4000 8000 4 4 8 2000 U 8000 4000 12000 4 2 6 4000 U 1600 4000 20000 4 1 5 (5+5x.1)= (3000+500)/2000= = 5.5 1.75 7.25

Note: total F.C and V.Cpu remain constant, and this is what we called relevant range. Relevant Range: Is the limit of cost driver activity within a specific relationship between costs and the cost driver is valid. FixedCost 16000 12000 8000 4000 Relevant range

500

1,000

1,500

2,000

2,500

Vol.

• Calculation break even sales volume in total of dollars and total units

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Managerial Accounting and control Dr. Mohamed Youssef Lecture 1 Breakeven Point : if total sales = total cost (no profit, no lost )

BEF= sales – Total cost=0 • • Sales Revenue = Q (unit Sold) x Unit selling prices (usp) = 1000 X \$5 = \$5000 Total Cost = (Variable cost + Fixed cost) = (V.C.+ F.C) = (Q xusp)+F.C = (1000 x \$3)+\$2000 BEP = sales- Total Sales = (Qxusp)-[(Qxuvc)+F.C] = 1000x \$5-[1000x \$3+\$2000]=0 BEPin unit = Q (usp-uvc)-F.C.=0 = Q (\$5-\$3)-F.C =0 = Q x ucm-F.C. =0 Unit Contribution Margin: The profit we obtain per unit which means the difference between the unit selling price and unit cost price (ucm)

BEPin unit = Q (usp-uvc)-F.C.=0 = Q x ucm – F.C =0 Q x ucm = F.C 1000 x \$2= 2000

Qin unit = (F.C /ucm)
\$3 uvc (60%) Usp \$5 ( 100 %) \$2 ucm (40%)

sales ravenous \$5000 (100%)

\$3000 vcp (60%) \$2000 F.C. (40%)

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Managerial Accounting and control Dr. Mohamed Youssef Lecture 1 (ucm/usp) = (F.C/sales revenue) sales revenue/ups =F.C/ucm sales revenue = (F.Cx ups)/ucm = F.C /(ucm%) = F.C/ (cm %)

BEPin \$ = F.C /(ucm%)
At BEP fixed cost should = total cm Sales(Q x usp) 1000 x \$5 1010 x \$5 Less V.C 1000 x \$3 1010 x \$3 Cm Less F.C. Net profit Margin of safty: In case Q=1000 5000 (3000) 2000 (2000) 0 A mount of sales above BEP (3030) 2020 (2020) 20 In case Q=1010 5050

Cost Volume Profit Graph

Sale revenoue Sales BEP Total expense line Sale F.C

\$5000 \$2000

BEP in Q 1000 in Chapter 2 7

Q