Running head: MANAGERIAL ACCOUNTING 1

Managerial accounting concepts and analysis

Job order costing

Process costing & analysis

Activity-based costing

Cost-behavior & cost-volume-profit analysis

Variable costing and analysis

Master budget & performance planning

Flexible budget & standard costing

Performance measurement & responsibility accounting

Relevant costing for managerial decision

Sesingen Limbu

BUS 535 Managerial Accounting

Westcliff University

Presidential Business School

Professor Birendra Mahato

October 18, 2018

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Abstract

This paper talks about the whole course in a brief manner. The main contents of the paper are

introduction of managerial accounting, different types of cost and costing method, master

budget, flexible budget and responsibility accounting. It can be taken as a summary of the whole

course from chapter 1 to chapter 10. Descriptions are in point wise.

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Chapter: - 1

Managerial accounting concepts and analysis

 Managerial accounting is the system which uses financial and non financial information

in order to make decision.

 Its users are internal like marketing manager, financial manager, sales department head

etc.

 Main purpose is planning and control.

 It does not mandatorily follow GAAP like the financial accounting.

 It focuses on the future on the basis of historical data.

 For example: - if last year sales was 500 units, after the increase in advertising expenses,

if the sales is 600 units this year, then the manager will focus on the advertising by

looking the pattern. This decision making process can be taken as managerial accounting.

 There is no time limit; it depends on the need of the manager or any specific condition.

Chapter: - 2

Job order costing

 It is a costing method based on the specific job or task. A job may be a case for lawyer,

patients for hospital, special order for tailor etc.

 This method is used by those organizations whose product or services are different or

non-identical.
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 Direct materials and direct labor costs are its allocation base. One of these cost are

selected as a base for calculating the cost.

 Predetermined rate is calculated in order to set a standard rate through which a whole

process can be analyzed.

 Predetermined overhead rate is calculated. The formula for this is

= Estimated total manufacturing overhead cost / Estimated total allocation cost

 After the calculation of predetermined overhead rate, manufacturing overhead rate is

calculated. The formula is: -

= Predetermined rate * Actual allocation base cost

 In case of over applied predetermined rate, it should be deducted from cost of goods sold

and should be added in case of under applied.

Chapter: - 3

Process costing and analysis

 It focuses on the whole process of production or manufacturing process of the products.

 When there are homogenous products like Coca-cola, Oreo biscuit etc., this costing is

used.

 Calculation of cost and units are based on weighted average method. The formula is

= Units transferred to next department or to finished goods + Equivalent units at the

end work in progress

For cost,

= (cost of beginning work in progress + cost incurred in the process) / production units
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 Unit costs are computed by department.

 It assumes that unit costs are same for all products because of the identical nature of

products.

 Cost are accumulated over fixed time of period, summarized and allocated to the units

produced in that particular time period.

Chapter: - 4

Activity-based costing & analysis

 It is the process of identifying the exact activity done in the manufacturing process and

spending expenses from the exact overhead.

 For example, installation of machine cost is incurred under machine set-up overhead.

 There are 4 level of activities which are: -

1. Unit level: -Direct engaged with the product. For example, direct labor.

2. Batch level: - Engaged in bulk products. For example, material handling, setting

up equipment etc.

3. Product level: - It is the task after the completion of product. For example, testing

the product.

4. Facility level: - It is the task outside of the real production process. For example,

factory administration.
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 The main purpose of this costing is to separate direct and indirect cost accurately because

semi-variable cost are hard to allocate under the exact overhead.

Chapter: - 5

Cost behavior & cost-volume-profit analysis

 Cost-volume profit analysis helps manager to decide on unit price, product or service to

offer, marketing strategy etc.

 It is a short term planning tool.

 It mainly focuses on the profit and how profit is affected by selling price, sales volume,

unit variable cost, total fixed cost and sales mix.

 Costs are mainly of two types: variable cost and fixed cost.

 Variable costs are direct material, direct labor, selling and administration expenses and

variable manufacturing overhead.

 Fixed costs are fixed manufacturing overhead and fixed selling and administration

expenses.

 Contribution margin is the amount remaining from the subtraction of variable cost from

sales revenue which is used to cover fixed cost.

 Contribution margin ratio is the percentage that shows how much will contribution

margin be affected with the change in total sales.

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 Break-even point is that point where the cost and the sales revenue are equal or there is

no profit or loss.

 BEP is calculated in order to know the point from where the company can start earning.

 Formula of BEP: -

Under equation,

Profit = Unit contribution margin * Quantity – Fixed cost (here Q will be the BEP

unit)

Formula method

= (target profit + fixed cost) / unit contribution margin

 Margin of safety is that point excess of budgeted or actual sales over the break-even

point. The formula is : -

= Total budgeted sales (or actual) – Break even sales

 If there is more than one types of product them it is the case of sales mix. The formulas

on this case are : -

BEP = Total fixed cost / Weighted contribution margin

Weighted contribution margin = Total contribution margin / Total sales units

 In the case of sales mix, individual BEP should be calculate first and then only overall

BEP is calculated.

Chapter: - 6

Variable costing and analysis

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 It is a tool and technique used for the managerial decision making process only.

 It has other names like marginal costing, contribution margin format, direct costing etc.

 Under this costing, direct material, direct labor and variable manufacturing overhead

expenses are accumulated as a product cost.

 Fixed manufacturing overhead, variable selling and administration overhead and fixed

selling and administration overhead are accumulated as a period cost.

 Absorption costing on other side adds fixed manufacturing overhead in product cost and

period cost is summation of variable selling and administration expenses and fixed selling

and administration expenses.

 Because of the way ii shows product cost and period cost, profit or loss shown by the

variable costing is different from that of absorption costing.

Chapter: - 7

Master budgets & performance planning

 A budget is the forecast or projection of revenues, activities and resource.

 A master budget is the combination of different but independent sub-budget.

 Before master budget, different sub budget should be prepared. Those sub budget are

sales budget, production budget, purchase budget, direct material budget, direct sales

budget, manufacturing overhead budget, selling and administrative budget and cash

budget.

 Sales budget is prepared by the sales department and is a forecast of sales.

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 What should be the production level according to the sales is shown by the production

budget.

 Direct material budget shows how much raw materials are needed to meet the production

and what will be the cost.

 Direct labor budget shows how many labor hours are required per unit of finished goods

and what will be the labor rate.

 Manufacturing overhead budget presents the estimated variable and total fixed overhead

cost.

 Selling and administration budget shows the fixed and variable cost of this overhead.

 Cash budget estimate the expenditure, cash inflows and outflows.

 Cash budget is prepared at the last before master budget because it has to collect

information from other departmental budget.

Chapter: - 8

Flexible budget & standard costing

 Because of the certainty that estimated and actual performance will result different, so

this flexible budget is prepared in order to analyze the difference.

 Actual costs are compared to what the cost should have been for the actual activities.

 It is a very essential tool to adjust the cost.

 Labor cost variance and material variance are fundamental bases for flexible budget.

 Variance is the difference between actual work/cost and estimated ones.

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 Material variances: -

Material unit variance (MUV) = (SQ *SP) – (AQ * SP)

Material price variance (MPV) = (AQ * SP) – (AQ * AP)

Material cost variance = MUV + MPV

 Labor cost variance: -

Labor efficiency variance (LEV) = (ST * SR) – (AT * SR)

Labor rate variance (LRV) = (AT * SR) – (AT * AR)

Labor cost variance (LCV) = LEV + LRV

Note: - SQ = standard quantity

SP = standard price

AQ = actual quantity

AP = actual price

ST = standard time

SR = standard rate

AR = actual rate

AT = actual time

Chapter: - 9

Performance Measurement and Responsibility Accounting

 Responsibility accounting means the accountability of the specific departments for their

individual financial or non financial statement.

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 There are basically 3 types of center: - cost center, revenue center and investment center.

 Cost center has the responsibility to control over direct material and direct labor.

 Revenue center control over the market segmentation, promotion expenses, selling price

etc.

 Investment center has to find out the profitability of the investment, new business

proposal and its profitability etc.

 Capital budgeting is the main tool fool the investment center.

 Evaluation is done under two methods: - discounted and non-discounted method.

 Under discounted method, these are the bases: -

 Discounted payback period = Minimum year + ( Amount to be recovered / CFAT

recovering amount)

 Net present value (NPV) = Total present value – Net cash outlay

 Internal rate of return = LR + ( NPV at LR / NPV @ LR – NPV @ HR) * (HR –

LR)

 Profitability index = Total present value / Net cash outlay

 Under non-discounted method

 Payback period

 Accounting rate of return = (Average EAT / Net cash outlay) * 100 %

Chapter: - 10

Relevant costing for managerial decision

 These are the separation of cost types.

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 Different types of cost information taken as a base for decision making can be relevant

and irrelevant cost.

 Avoidable cost, sunk cost and opportunity cost are three basic cost.

 Avoidable costs are those cost which can be avoid in future.

 Sunk costs are those cost which are already incurred and cannot be avoided.

 Opportunity costs are those cost which shows the potential of profit in alternatives.

 Decision like making or buying, order acceptable or not, either to use certain resource or

not etc are made using those cost information.

All those previously mentioned description are chapter wise and is presented sequentially. Those

are the things that we learned from the course.

References: -

Brewer, P. C., Garrison, R. H., & Noreen, E. W. (2016). Introduction to managerial accounting

(7th ed.). New York: McGraw-Hill Education.

Wild, J. J., & Shaw. K. W. (2016). Managerial Accounting (5th ed.). New York: McGraw-Hill

Education.
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