MANAGERIAL ACCOUNTING

COST BEHAVIORS, SYSTEMS, AND ANALYSIS

with Gary Hecht

Introduction to Managerial Accounting

and Costing Concepts
Course Introduction and
Concept Overview
LESSON 1-1 OBJECTIVES

You will understand:

What managerial accounting is

Why managerial accounting is

important

Contemporary issues
WHAT IS MANAGERIAL
ACCOUNTING?

“The process of obtaining, creating,

and analyzing relevant information to
help achieve organizational goals.”
COMMON CONCEPTIONS

Tax returns

Financial statements
FINANCIAL STATEMENT USERS

Investors and Creditors and

potential potential
investors creditors

Suppliers,
customers, Organization Competitors
other partners

Tax Regulatory
authorities agencies
WHAT’S THE DIFFERENCE?

Financial accounting Managerial accounting

Internal and external users Internal users

General, aggregated financial Detailed, specialized for a specific

statements decision, setting, etc.

Reporting of the past; historical Designed for future decisions

Guided by principles, standards, and Case-specific; best practices

rules (generally accepted accounting
principles)
WHY IS MANAGERIAL
ACCOUNTING IMPORTANT?

Facilitates decisions
Creates, organizes, and shares the
right information to allow for the best
decision

Guides/Influences decisions
Helps align managers’ and
employees’ decisions with what is
best for the firm
BY THE WAY . . .

What types of organizations?

“Information”?
Focus on measurement
Quantitative
Currency-based
Alternatives?
CONTEMPORARY ISSUES

Global organizations

Value chain and strategic alliances

Social considerations

Ethics
WHAT WE’VE LEARNED
IN LESSON 1-1

Definition and distinction of

managerial accounting

Purpose of managerial
accounting within organizations

Contemporary issues
Costing Concepts
LESSON 1-2 OBJECTIVES

You will understand:

Basic terminology

How to organize costs

according to type

Cost behavior basics

TERMINOLOGY

Cost
Just money?
“Usage of resources”

Cost Object
Product
Can be anything
COST FRAMEWORK 1
OBJECTS
Organization of costs by
relation to cost object
Direct costs
Materials
Labor
Indirect costs
Necessary, but difficult/infeasible
to trace to the cost object

“Catch-all” category
INDIRECT COSTS

Example scenario

Overhead

In multiple-product scenarios,
how overhead is allocated to
products influences the perceived
cost of the product

If arbitrary or inaccurate, may lead

to poor decisions
COST FRAMEWORK 2
BEHAVIOR

For decision making, we’ll often

find it useful to classify costs
based on “cost behavior”

That is, how costs are associated

with some activity of interest
ROLE OF COST BEHAVIOR

Determine product profitability

(i.e., choose among potential
products to produce)

Determine whether to change

product price

Determine whether to add/drop a

product line

Determine whether to outsource

BASIC IDEA

Total Cost = Fixed Costs + Variable Costs

Variable Costs Per “Activity” x Volume of “Activity”

EXAMPLE SCENARIO

Variable cost per unit = $1

Fixed costs are $100,000

Production volume = 1 to 100,000

 COST BEHAVIOR –
TOTAL VARIABLE COSTS
COST

Total variable costs

increase with production volume

PRODUCTION VOLUME
 COST BEHAVIOR –
UNIT VARIABLE COSTS

Unit variable costs do not

UNIT COST

change with production volume

PRODUCTION VOLUME
 COST BEHAVIOR –
TOTAL FIXED COSTS

Total fixed costs do not

TOTAL COST

change with production volume

PRODUCTION VOLUME
 COST BEHAVIOR –
UNIT FIXED COSTS
COST

Unit fixed costs vary

with production volume

PRODUCTION VOLUME
EVERYTHING’S LINEAR?
 COST BEHAVIOR –
UNIT VARIABLE COSTS

Unit variable costs do not

UNIT COST

change with production volume

PRODUCTION VOLUME
 COST BEHAVIOR –
TOTAL FIXED COSTS

Total fixed costs do not

TOTAL COST

change with production volume

PRODUCTION VOLUME
 EVERYTHING’S LINEAR?

Relevant range for

which linear
TOTAL COSTS

patterns are valid

Normal
activity
range

UNITS PRODUCED
WHAT WE’VE LEARNED
IN LESSON 1-2

Terminology
Even the most basic concepts –
such as “costs” – are not that simple

Different ways to organize cost

information
Relationship with cost object (direct vs.
indirect)
Relationship with activity of interest
(behavior)
WHAT WE’VE LEARNED
IN MODULE 1

Definition, purpose, and distinction

of managerial accounting

Contemporary issues

Basic concepts

How to organize cost

information according to
multiple cost frameworks