ST.

VINCENT’S COLLEGE INCORPORATED

Padre Ramon St., Dipolog City
Philippines

COLLEGE OF ACCOUNTING EDUCATION

aPrEe1 22 – Professional Education Elective 1 (Management Accounting 1)

COURSE INFORMATION
Course Number aPrEe1 22 Course Title Professional Education Elective 1 (Management Accounting 1)
Course Code PrE ELEC Instructor Angel D. Calaguian, CPA-MBA, CTT
Course Credit 3 units Email Address svcicae@svc.edu.ph Consultation Hours By appointment
School Year 2020-2021 Class Schedule To be arranged Room TBA
COURSE DESCRIPTION
This is the first part of Management Accounting and deals with the overview of management accounting and management advisory services; financial statements analysis;
basic cost management concepts; cost behavior and cost estimation patterns; variable costing; and cost-volume-profit relationships.
COURSE LEARNING OUTCOMES
After completing the course students can:
 describe the basic concepts and practices of management services (CO 1)
 analyze and interpret financial information and reports (CO 2);
 classify costs according to the different concepts, classes or categories (CO 3);
 prepare, analyze and contrast the different accounting information using traditional vis-à-vis variable costing (CO 4); and
 apply the different concepts and techniques for planning and control (CO 5).
TEACHING STRATEGIES / DELIVERY MODES
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Online teleconferencing lecture/discussion is conducted There will be no classroom meet-ups. Classroom lecture and discussion meet-ups is
only once a week for MWF Classes and once a week for conducted only once a week for MWF Classes and once
TThS classes with two (2) hours per meeting. However, web content resources are provided at regular a week for TThS classes with two (2) hours per meeting.
intervals.
Self-directed learning and/or home assignments are to Self-directed learning and/or home assignments are to
be spent with allocated two (2) hours per week. be spent with allocated two (2) hours per week.
 Assessment and evaluation will be done at regular
The remaining two (2) hours per week is to be devoted intervals depending on the promptness of the The remaining two (2) hours per week is to be devoted
in checking the materials submitted/sent by the students compliance of students to every assessment given. in checking the materials submitted/sent by the students
and giving feedbacks, discussions, and clarifications. and giving feedbacks, discussions, and clarifications.

GRADING SYSTEM
Blended (Asynchronous
Description Online (Hybrid Model Offline (Flex Model)
Model)

Quizzes/Assignments 50.0% 50.0% 50.0%

Preliminary Term Major Examination 12.5% 12.5% 12.5%
Midterm Major Examination 12.5% 12.5% 12.5%
Semi-Final Major Examination 12.5% 12.5% 12.5%
Final Term Major Examination 12.5% 12.5% 12.5%
Total 100.0% 100.0% 100.0%

COURSE OUTLINE
Preliminary Term Midterm Semi-Final Term Final Term

Week 1 Week 3 Week 5 Week 7 to 8

 Management Accounting and
Management Advisory Services
Overview; and Management
Accounting and Business
Environment
Week 2
 Financial Statement Analysis
 Basic Cost Management  Absorption Costing versus  (Self-directed learning)
Concepts; and Cost Behavior Variable Costing
Patterns
Week 6
Week 4  Cost-Volume-Profit Relationship
 Cost Estimation Methods
Semi-Final Term Major Examination Final Term Major Examination
Midterm Major Examination

Preliminary Term Major Examination

Preface

This course learning module which is a professional education elective course (Management Accounting 1) provides students an understanding of the nature of management
accounting and management advisory services; the business environment and the contemporary issues in the modern world circumventing management accounting; financial
statements analysis and use; the basic cost management concepts; analysis of cost behavior patterns; the application of cost estimation methods; and analysis of CVP relations.

The module is divided into topics. Each topic coverage begins with an abstract of what the topic is all about, as well as the lesson objectives that indicate what the students
are expected to learn. The basic concepts are presented on each section of the Topic Content, after which problem exercises are to be supplied answers with. These exercises
may vary from topic to topic in terms of difficulty and application.

These learning material are adapted from books on management advisory services, management accounting, and other related materials by prominent local and foreign
authors.

Topic Coverage

The topics with their respective title and abstract are as follows:

1. Management Accounting and Management Advisory Services: Overview – this presents the overview concepts of management accounting and management advisory
services.

2. Management Accounting and the Business Environment – this presents the contemporary techniques applied the modern world circumventing management
accounting.

3. Financial Statement Analysis – this focuses on the concepts and limitations of financial statements, as well as the ways in analyzing financial statements.

4. Basic Cost Management Concepts – this presents the different terminologies used on the study of cost accounting and cost management.

5. Cost Behavior Patterns and Cost Estimation – this focuses on the analysis of cost behavior patterns; as well as the application of the different cost estimation methods.

6. Variable Costing – this focuses on the distinction between variable costing and absorption costing.

7. Cost-Volume-Profit Relationship – this focuses on the analysis of the different factors affecting the determination of profit; as well as the interrelationship among
these factors.
MANAGEMENT ACCOUNTING AND MANAGEMENT ADVISORY SERVICES: OVERVIEW; and
MANAGEMENT ACCOUNTING AND THE BUSINESS ENVIRONMENT
Time Duration and Allotment: Week 1; 6 hours

Abstract:
This topic covers the overview concepts of management accounting and management advisory services, as well as the contemporary techniques applied the modern world
circumventing management accounting.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
 Describe the nature, characteristics, and functions of management accounting, as well as management advisory services;
 Differentiate controllership and treasurership; as well as differentiate line function and staff function;
 Familiarize the standards of ethical conduct for management accountants; and
 Familiarize the major contemporary management techniques in the changing world of the management accounting.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

TOPIC CONTENT

 MANAGERIAL ACCOUNTING – a branch of accounting that provides information to management.

 MANAGEMENT- the process of planning, organizing, and controlling a certain task to realize the objectives of the organization.

 BASIC FUNCTIONS OF MANAGEMENT

I. Planning- involves setting up and immediate and long-term goals; deciding which alternative means would best suited to attain the set goals.
II. Organizing- involves deciding how to utilize available resources as plans are carried out; tackling activities necessary to achieve corporate objectives
such as staffing, subordinating, directing and motivating.
III. Controlling- involves actual performance with set plans or standards; deciding what corrective actions to take should there be any deviation (variance)
between actual and planned performance.
NOTE: Decision making is an inherent function of management; all management functions would require a certain amount of decision making.
 Management by Objectives VS. Management by Exception
 Management by Objectives- is a procedure in which a subordinate and a supervisor agree on goals and the methods of achieving them and develop a plan in
accordance with that agreement. The subordinate is then evaluated with reference to that agreed plan at the end of the period.
 Management by Exception- is a technique of highlighting those which vary significantly from plans and standards in line with the management principle that
executive time should be spent on items that are non-routine and are identified as top priority.

 MANAGEMENT ACCOUNTING- an application of appropriate techniques and concepts in processing historical and projected economic data of an entity to
assist management in establishing plan to meet economic objectives and in making rational decisions with a view toward achieving the objectives.

 MANAGEMENT ACCOUNTING VS. FINANCIAL ACCOUNTING

FINANCIAL ACCOUTING MANAGEMENT ACCOUTING
1. User of information Primarily for external users Exclusively for internal users (management)

2. Guiding Principles Generally Accepted Accounting Principles Management wants and needs

3. Optional/Mandatory Mandatory(especially for public entities) Discretionary or Optional

4. Type of information Primarily monetary (financial)in nature Monetary and non-monetary

5. Emphasis of reports Reliability (precision of data) Relevance (timeliness of data)

6. Purpose/End Result Financial reporting and compliance Decision making

7. Source of data From company’s (internal) info system From internal and external sources

8. Amount of detail Compressed and simplified Extensive and detailed

9. Focus of information Focus mainly on business as a whole Focus on segments and business as a whole

10. Frequency Periodic (annually, quarter) As frequent as needs arise

 11. Time orientation Mainly historical (past) data Future-oriented using current and past data

12. Unifying model Assets= Liabilities + Equity No unifying model or equation

 CONTROLLER: CHIEF MANAGEMENT ACCOUNTANT

 Controllership- the practice of the established science of control, which is the process by which management assures itself that the company resources are
obtained and utilized according to plans that are in line with the company’s set objectives.
 Controller- is an officer of an organization who has responsibility for the accounting aspect of management control. It is a title given to a person holding the
position of a chief management accounting executive of a business enterprise. In many accounting texts and business literatures, the controller is often referred
to as the “chief accountant”.

 LINE FUNCTION VS. STAFF FUNCTION

 Line function- the authority to give command or orders to subordinates. It exercises direct downward authority over line departments (e.g., VP Operations over
Operations manager).
 Staff function- the authority to advise but not to command others; the function of providing line and staff managers with specialized service and technical
advice support.it is exercised laterally or upward.

The controller primarily exercise a staff function as the controller’s office fives advice and service to other departments and to entire organization as a whole;
however, in accounting department that is headed by the controller, the controller has a line authority over subordinates.

 CONTROLLER VS. TREASURE

To avoid incompatible duties assigned to a single officer a controller, who is primarily concerned with accounting, must not hold at the same time the
position of a treasurer, who is primarily concerned with custody of funds. Consider the following;

CONTROLLER (PRETGPE) TREASURER (PISBCII)

Planning and control Provision of capital
Reporting and interpreting Investors relations
Evaluating and consulting Short-term financing
Tax Administration Banking and custody
Government reporting Credit and collections
Protection of Assets Investments
Economic Appraisal Insurance
 STANDARDS OF ETHICAL CONDUCT FOR MANGEMENT ACCOUNTANTS
According to the standards of ethical conduct set by the Institute of Management Accountants (IMA), management accountants have a responsibility to;
1. Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills. COMPETENCE
2. Refrain from disclosing confidential information acquired in the course of their work, except when authorized and/or unless legally obligated to do so.
CONFIDENTIALITY
3. Refrain from engaging in any activity that would prejudice their ability to carry out duties ethically. INTEGRITY
4. Communicate information fairly and objectively and disclose fully all relevant information relative to users’ need. OBJECTIVITY

 Institute of Management Accountants – Code of Ethics

1.1 Competence
1.1.1 Maintain an appropriate level of expertise by continuing developing knowledge and skills
1.1.2 Perform duties in accordance with relevant laws, regulations and technical standards
1.1.3 Provide decision support information and recommendations that are accurate, clear, concise and timely
1.1.4 Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance on activity.

1.2 Confidentiality
1.2.1 Keep information confidential except when disclosure is authorized or legally required
1.2.2 Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates activities to ensure compliance.
1.2.3 Refrain from using confidential information for unethical and illegal advantage.

1.3 Integrity ( Internal Honesty)

1.3.1 Mitigate actual conflict of interest; regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any
potential conflicts.
1.3.2 Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
1.3.3 Abstain from engaging in or supporting any activity that might discredit the profession.

1.4 Credibility(External Honesty)

1.4.1 Communicate information fairly and objectively
1.4.2 Disclosure all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or
recommendations.
1.4.3 Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and /or applicable
law.

1.5 Resolution of Ethical Conflicts

 1.5.1 Discuss the issue with your immediate except when it appears that the supervisor is involved. In that case, preset the issue to the next level. If you cannot
achieve a satisfactory resolution, submit the issue to the next management level. If your authority may be a group such as the audit committee, executive
committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superior’s
knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or engaged by the
organization is not considered appropriate, unless you believe there is clear violation of law.
1.5.2 Clarify event ethical issues by initiating a confidential discussion with an IMA Ethics counselor or other impartial advisor to obtain a better understanding
of possible courses of action.
1.5.3 Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

 MANAGEMENT ADVISORY SERVICES – the function of providing professional advisory services, the primary purpose of which is to improve the client’s
use of its capabilities and resources to achieve the objectives of the organization. (AICPA Committee on Management Services – MAS Statement No.1)

- refers to the function of providing professional advisory (consulting) services, the primary purpose of which is to improve client’s use of its capabilities and
resources to achieve the objectives of the organization.

 CHARACTERISTICS OF MANAGEMENT ADVISORY SERVICES (MAS) ENGAGEMENTS

1. Services are rendered for the management (third party client)
2. Involves problem solving
3. Relate to future
4. Broad in scope
5. Involves varied assignments
6. Engagements are usually non-recurring
7. Engagement mostly require highly-qualified staff.
8. Human relations play a vital role in each engagement.

 Comparison of Auditing and Management Advisory

External Auditing Management Advisory Services
Beneficiary of Services Third party (Stockholder’s Investor’s Management
Creditors, Customers, etc.)
Objective Rendering an Opinion Solving a Problem
Focus Past/Historical Data Futuristic Data
Scope Specific ( Financial Statement) Broad in Scope Varied Assignment
Precise Objective
 Recurrence of Engagement Annually
Staff Requirement Mixture of Experienced and inexperienced
(depending on the risk)
Client’s Coordination Usually people from the accounting
department
Non-recurring (Assumption that an
acceptable solution has been generated and
accepted)
Usually highly qualified and experienced
staff.
Usually requires both executives and
employees of the client.

 CURRENT FOCUS OF MANAGERIAL ACCOUNTING

FACTORS THAT CONTRIBUTED TO CHANGES IN THE WORKPLACE

1. Increase in Competition- both in local and global
2. Technological Advancement

Due to the above factors, new ideas, concepts, and methods are introduced to management. Again, management accountants and management consultants
play a major role in the application of these innovations.

 THE NEW MANAGEMENT PRACTICES

1. Just in Time
2. Total Quality Management
3. Business Process Re-engineering
4. Target and Kaizen Costing
5. Product Life Cycle Costing
6. The Theory of Constraints

 GENERAL OBJECTIVES OF THE NEW MANAGEMENT PRACTICES

a. To enhance quality of products/services
b. To reduce costs
c. To increase output
d. Prompt delivery of goods/services
e. To increase profit

 JUST-IN-TIME –What you need becomes available just in time you will use it.

JIT Purchasing- raw materials received just in time to go into production.

 JIT Manufacturing- Manufactured parts are completed just in time to be assembled into the company’s products and products are manufactured/completed just in
time to be delivered to customers.

Advantages of Using JIT

a. Inventory cost savings
b. Release of facilities
c. Prompt Delivery
d. Reduction of defective goods and services and quick response to customer’s need.

 TOTAL QUALITY MANAGEMENT (TQM) –an approach to continuous improvement that focuses on serving customers and uses front-line workers to identify
and solve problems systematically.

Quality cost- cost incurred on quality related process; these are cost incurred to prevent defects, or incurred as a result of defect occurring.
1. Conformance Cost- incurred to keep defective products from falling into the hands of customers.
a. Prevention Cost- cost relating to any activity that reduces the number of defects in products and services.
b. Appraisal Cost- cost incurred in activities relating to inspection to make sure that the products/services meet quality standards.
2. Non-conformance Costs- incurred because defects are produced despite efforts to prevent them.
a. Internal Cost- result from identification/discovery of defects during the appraisal/inspection process.
b. External Failure Costs- result when defective product is delivered to a customer.

 BUSINESS PROCESS RE-ENGINEERING (BPR) –the redesigning or elimination of inefficient business process.

Business Process- any series of steps that are followed to carry out some tasks or activities in a business.

PR Procedures- A business process is a diagrammed in detail, analyzed and then completely redesigned.
Objectives:
1. Simplification of business process
2. Elimination of non-value added activities
3. Reduction of opportunities
4. Cost reduction

 TARGET AND KAIZEN COSTING

 Cost Plus Method – one of the most traditional and common pricing technique. It is done by adding a percentage to the estimated cost of the product.
 Computing the Target Cost- Organization use the market research to establish the number of units they are likely to sell and the unit price that the customers
are willing to pay for the product. From this selling price, a company subtracts the profit objective, arriving at a target cost.
  Kaizen costing is the method of focusing on obtaining small, incremental cost reductions (rather than big changes at longer intervals) during the production
phase of the product life cycle. It is based on the belief that nothing is ever perfect, so improvements and reductions in the variable costs are always possible.

 THE THEORY OF CONSTRAINTS (TOC) –states that a key to success is effective management of constraints.
Constraints- anything that prevents an individual or a business organization from getting more of what the individual or organization wants; it prevents the individual
or organization from achieving higher performance relative to its goal.

 Terminologies
TERMINOLOGY DEFINITION
Just-In-Time (JIT) JIT is a production system also known as pul-it-through approach, in which materials are purchased and units are produced
only as needed to meet actual customer demand; In a JIT system, inventories are reduced to the minimum level and, in some
cases, reduced to zero.
Total Quality TQM is a technique in which management develops policies and practices to ensure that the firm’s products and services
Management (TQM) exceed customers’ expectations; it is a formal effort to improve quality throughout an organization’s value chain.
Value Chain This refers to the sequence of business functions in which usefulness is added to the products or services of a company; The
term value refers to the increase in the usefulness of the product or servie and as a result its value to the customer.
Cross-Functional Cross-functional managerial teams bring together production and operations managers, marketing managers, purchasing and
Teams material-handling specialists, design engineers, quality management personnel, and managerial accountants to focus their
varied expertise and experience on virtually all management issues.
Life Cycle Costing It is a management technique to identify and monitor the costs of a product throughout its life cycle.
Target Costing This involves the determination of the desired costs for a product or the basis of a given competitive price so that the product
will earn a desired profit. The basic relationship that is observed in this approach:
Target cost = Market determined price – Desire profit.
Time-Based A company can gain an important edge over its competitors by reducing the time (e.g., lead time, response time, on time and
Competition downtime) it takes to develop a new product and transporting the product in the market more quickly.
Continuous It is the constant effort to eliminate waste, reduce response time, simplify the design of both products and processes, and
Improvement improve quality and customer service. The term “kaizen” is oftentimes used to mean continuous improvement.
Benchmarking It is a process, by which a firm identifies its critical success factors, studies the best practices of other firms (or other units
within a firm) for these critical factors and then implements those improvements in the firm’s process to match or beat the
performance of other firms/units.
Business Process Any series of steps that are followed in order to carry out some task in business.
Reengineering It is process for creating competitive advantage in which a firm reorganizes its operating and management functions, often
with the result that jobs are modified, combined, or eliminated.
Business Process This is a more radical approach to improvement than TQM wherein a business process is diagrammed in detail, questioned
Reengineering and then completely redesigned in order to eliminate unnecessary steps, to reduce opportunities for errors and to reduce costs.
 Computer-Aided CAD is the use of computers in product development, analysis, and design modification to improve the quality and
Design (CAD) performance of the product.
Computer-Aided CAM is the use of computers to plan, implement and control production.
Manufacturing
Flexible FMS is a computerized network of automated equipment that produces one or more groups of parts or variations of a product
Manufacturing System in a flexible manner.
(FMS)
Computer-Integrated A CIM process is fully automated, with computers controlling the entire production process allowing hour-by-hour
Manufacturing (CIM) manufacturing management; CIM employs the use of state-of-the-art equipment that may help firms meet the challenge of
global competition, but they also have a significant effect on the composition and behavior of product costs.
Note: The rate at which technology is changing means that the life cycle of most products are becoming shorter, enabling
manufacturers to produce a more diverse set of products.
e-Commerce The use of internet as a competitive advantage tool in conducting business.
Operational Auditing Also known as management audit and performance audits, operational audit is conducted to evaluate the effectiveness and/or
efficiency of operators; “operational” implies that the information obtained in the audit process is useful to management in
decision making; “performance” implies evaluation of the performance of persons or units in executing the entity’s objectives.
Effectiveness This refers to an entity’s success in achieving goals and objectives.
Efficiency This refers to how well an entity uses its resources to achieve its goals.
Economy This refers to an entity’s success in maximizing the use of limited resources to achieve its goals and objectives.

Activities, Resources, and Assessment

Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Management Accounting, Concepts and
Textbook: Management Accounting, Concepts and Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita Balatbat Cabrera.
Applications by: Ma. Elenita Balatbat Cabrera. Applications by: Ma. Elenita Balatbat Cabrera.

Activities: Activities: Activities:

Topic discussion will be through GoogleMeet App., Topic discussion will be through GoogleMeet App., Topic discussion will be during classroom meetups, and
during which the exercises will be supplied with during which the exercises will be supplied with during which the exercises will be supplied with
answers. answers. Such teleconferencing will be recorded, the answers.
video of which will be made available to you via
Messenger Group Chat or Gmail address.
Assessment:
Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Assessment:
Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Assessment:
Topic quiz will be issued to you and will be answered
at home, which will be immediately due for submission
the following day at the box placed at the SVCI guard
house. Communication as to the receipt the said quiz
will be through text messaging.
FINANCIAL STATEMENT ANALYSIS
Time Duration and Allotment: Week 2; 6 hours

Abstract:
This lesson focuses on the concepts and limitations of financial statements, as well as the ways in analyzing financial statements.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
 Discuss the elements and limitations of financial statements;
 Analyze and interpret ratios, as well as evaluate the past performance of the company through financial ratios; and
 Differentiate the various activities of the firm – operating, investing and financing.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

TOPIC CONTENT
 Limitations to Financial Statements Analysis
Note: Limitations of analysis may be overcome to some extent by finding appropriate benchmarks against which to measure a company’s performance.

 FS ANALYSIS - Involves the evaluation of the firm’s past performance, present condition, and business potentials by way of careful analysis of its financial
statements pertaining to matters like:
 Profitability of the business firm
 Ability to meet company obligations
 Safety of investment in the business
 Effectiveness of management in running the firm

 Objectives of the financial statement analysis

1. General – identify the organization’s financial strengths and weaknesses.

2. Owners – concerned with investment income, profitability, stability and sound capital structure necessary for continued successful operations.
3. Potential investors – stability of earnings and dividends.
 4. Short-term creditors – short-run liquidity.
5. Long-term creditors – long term security of their interest income and the company’s ability to maintain successful earnings and cash flows to meet continuing
financial commitments.

 Generally, there four aspects of the business enterprise worth analyzing, namely:

1. Solvency – is the ability of the business to pay its obligations on time. The analysis of solvency centers on the composition of current assets and current
liabilities. Liquid assets must be sufficient to meet maturing obligations of the firm. The business may have sufficient assets to meet all of its obligations,
yet it may at the same time be in an illiquid position because the monetary assets are not enough to pay off its obligations as they mature.

2. Profitability – is the ability of the business enterprise to earn sufficient income to pay dividends regularly and to steadily increase the interest of the owners
in the business. It is determined by the nature and amount of earnings, and their regularity and trend.

3. Stability – is the ability of the enterprise to pay interest and principal amounts on its maturing indebtedness, as well as its ability to pay regular dividends to
the owners. Information about operational activities and financial condition should be studied in order to properly judge the stability of the firm. This will
include the evaluation of the ability of the firm to generate enough income to cover its costs of operations, interest on borrowed capital, and dividend
requirements. The productivity and proper employment of assets should be analyzed.

4. Potential for growth – refers to the ability of the business enterprise to expand its operations in accordance with its growth plans. Growth and development
will affect the amount and direction of future cash flows, its solvency and ability to pay regular dividends, and the relative mix of productive assets.
Expansion into new markets, the rate of growth in existing markets, rate of increase in earnings per share, and research and development expenditures are
some of the aspects that must be analyzed to provide information about growth potential.

 General Approaches / Steps to Financial Statements Analysis

1. Background study and evaluation of the firm industry, economy and outlook
2. Short-term solvency analysis
3. Long-term solvency
4. Capital structure
5. Operational efficiency and profitability
6. Other Considerations – Quality of earnings and quality of assets and its relative amount of debt.
 Limitations to Financial Statements Analysis

Generally, FS Analyses have the following limitations:

1. Information derived by the analysis are not absolute measures of performance in any and all of the areas of business operations. They are only indicators of
degrees of profitability and financial strength of the firm.
2. Limitations inherent in the accounting data the analyst work with.
3. Limitations of the performance measures or tools and techniques used in the analysis.
4. Analysts should be alert to the potential for management to influence the outcome of financial statements in order to appeal to creditors, investors, and
others.

Specifically,

1. The results of analytical procedures applied emphasize only certain trends and changes in the individual items and relationships. The reason behind the trend
is not provided. The analyst should investigate further to answer the question, “why?”
2. Ratios and percentages are affected by any changes in accounting procedures the company may have adopted in the current period in relation to prior periods.
Erroneous conclusions may be drawn from the results of analysis ulness the user of the information is aware of such changes.
3. Conventional financial statements do not reflect the effects of changing price levels. Misperceptions can result from the failure to account for the effects of
inflation or deflation. For example, a net income figure of P500,000 for 2020 compared with P250,000 for 2019 normally mean an increase of 100% over
the net income of the previous period. But when price levels have increased 100%, the apparent rise in net income of P250,000 is only an illusion because
the purchasing power derived from net income of the current year is exactly equal to the purchasing power derived from net income of the previous year. In
short, since the price have doubled, P1.00 in 2019 is equivalent to P2.00 in 2020. Thus, the firm is no better in year 2020 than it was in year 2019 insofar as
net income is concerned.
4. Use of different accounting procedures by two or more companies will result in ratios and percentages that are not comparable. Adjustments will have to be
made if an intelligent comparison is to be made regarding the performance and status of two or more companies. Comparability assumes the use of the same
accounting principles and procedures.
5. Information reflected on financial statements is not exact and not final. Estimates and judgment are applied by the accountant in measuring operating result
and financial position. Thus the financial report is basically a mixture of facts and opinions. It follows then that analytical data are intrinsically tentative in
character and single measurements should not be given too much weight and importance.
6. Financial statements are the basis of financial analysis are historical reports. They merely provide a basis for predicting future events. Moreover, they only
include matters that are capable of quantification or financial measurement. Other vital information such as industry changes, management changes,
competitor’s actions, technological developments, government actions, and union activities are not provided by traditional financial statements.
Note: Limitations of analysis may be overcome to some extent by finding appropriate benchmarks against which to measure a company’s performance.
 Interpretation. Financial statement analysis is just one tool or means of interpreting intelligently financial data. It is a mere guide so that user of the data can arrive
at a sounder decision whether it is to invest, to lend, to keep the investment, or dispose of it, etc. To arrive at more informed conclusions, however, the statement
user must be able to interpret the results of financial analysis. In other words, there should be a standard against which the result of analysis could be compared.
These standards may be summarized as follows:

1. Personal standards, which are based on the analyst’ own experience and observation.
2. Budgeted standards, which come from the company’s goals and plans as reflected on the budget.
3. Historical standards, which refer to the company’s performance in the past.
4. Rule-of-thumb standards, which are general universal guides, such as the 2-to-1 current ratio.
5. Other company’s and industry standards, which are obtained from other companies’ financial standards, trade publications, and published refernces.

 VARIOUS MODES OF FINANCIAL STATEMENT ANALYSIS

1. Horizontal analysis
2. Vertical analysis
3. Financial ratios
4. Gross profit variation analysis
5. Cash flow analysis

 HORIZONTAL ANALYSIS

Horizontal analysis (sometimes called ‘trend’ or ‘index’ analysis) involves comparison of amounts shown in the FS of two or more consecutive periods. The
difference and percentage change of the amounts are calculated using the earlier period as the base period. Consider the following formula:

Most Recent Value – Base Period Value

Percentage Change (∆%) = --------------------------------------------------
Base Period Value

Comparisons can be made between an actual amount compared against a budgeted amount, with the ‘budget’ serving as the basis or pattern of performance.

Computational Guidelines. In preparing statements that reflect horizontal analysis, certain guidelines should be followed in the computation of the absolute (peso
amount) and relative (percentage) changes. They may be summarized as follows:
1. To arrive at the peso amount of change, the amount of an item in the preceding year is deducted from the amount of the same item in the current year; if the
difference is positive, it is an increase and if negative, a decrease.
2. To compute for the percentage change, the amount of increase or decrease should be divided by the amount of the item in the preceding year.
3. If there is no change in an item, no percentage increase or decrease can be computed.
 4. If the amount in the preceding year or base year is zero or negative, a peso increase or decrease may be calculated but it cannot be expressed as a percentage.
5. If the amount in the current year is zero is negative, a peso increase or decrease can be calculated but a percentage change can only be computed if the
amount in the preceding or base year is positive.

LIMITATIONS: If a NEGATIVE or a ZERO amount appears in the base year, percentage change cannot be computed.

 VERTICAL ANALYSIS

Vertical analysis is the process of comparing figures in the FS of a single period. It involves conversion of amounts in the FS to a common base. This is accomplished
by expressing all figures in the FS as percentages of an important item such as total assets (in the balance sheet) or net sales (in the income statement). These
converted statements are called common-size statements or percentage composition statements. Percentage composition statements are used for comparing:
o Multiple years of data from the same firm.
o Companies that are different in size
o Company to industry averages

The following are the normal base items usually utilized in the preparation of common-size statements:
1. Balance sheet – total assets or total equities
2. Income statement – net sales
3. Retained earnings statement – beginning or ending balance
4. Statement of cash flows – total cash inflows or total cash outflows
5. Statement of cost of goods manufactured – total manufacturing cost

 FINANCIAL RATIOS
Financial ratios involve development of mathematical relationships among accounts found in the FS. Financial ratios provide relevant information about the firm’s
liquidity, solvency, stability, profitability and other aspects of an entity’s financial situation and potential.

BASIC RULES IN COMPUTING FINANCIAL RATIOS

 When calculating a ratio using balance sheet amounts only, the numerator and denominator should be based on amounts as of the same balance sheet
date. The same is true for ratios using only income statement numbers. Exception: calculation of growth ratios.
 If an income statement amount and a balance sheet amount are used at the same time to calculate a ratio, the balance sheet amount should be expressed
as an AVERAGE for the time period represented by the income statement amount.
 If the beginning balance sheet account is not available and cannot be computed from the given data, the ending balance of the account is used to
represent the average balance.
 If sales and/or purchases are given without making distinction as to whether made in cash or on credit, assumptions are made depending on the ratio
being calculated:
 Turnover ratios: sales and purchases are made on credit.
  Cash flow ratios: Sales and purchases are made in cash.
 As a rule, an operating year is assumed to have 360 days, unless specified otherwise.
 A 360-day year is generally preferred as this is consistent with a 12-month year and a 30-day month;
 Alternatively, a year may be comprised of 365 calendar days, 300 working days or any appropriate number of days.

 TESTS OF LIQUIDITY (Liquidity refers to the company’s ability to pay its current liabilities as they fall due.)
Current Ratio (Banker’s Current Assets It is a measure of adequacy of working capital. It is the primary
Ratio) Current test of liquidity to meet current obligations from current assets.
(Working Capital Ratio) liabilities
Quick assets It measures the number of times that the current liabilities
Quick Ratio
Current could be paid with the available cash and near-cash assets (i.e.,
( Acid Test Ratio)
liabilities cash, current receivables and marketable securities.)

 WORKING CAPITAL ACTIVITY RATIOS (Efficiency Ratios)

Income Statement Account No. of Days in a Year
Turnover Average age
Average Balance Sheet Account Turnover
Net Credit Sales It measures the number of times receivables are
Receivable Turnover
Average Receivables recorded and collected during the period.
Average Age of It indicates the average number of days during
Receivables( Average 360 days which the company must wait before receivables
Collection Period) ( Days’ Receivables Turnover are collected.
Sales in Inventory)
Cost of Goods Sold It measures the number of times that the inventory
Inventory Turnover Ave. Merchandise is replaced during the period.
Inventory
Average Age of Inventory* It indicates the average number of days during
( Inventory Conversion 360 days which the company must wait before the
Period) Inventory Turnover inventories are sold.
( Days’ Sales in Inventory)
Cost of Materials Used
Raw Materials Turnover
Average Raw Material Inventory
Cost of Goods Manufactured
Work In Process Turnover
Average Work in Process Inventory
Cost of Goods Sold
Finished good Turnover
Average Finished Goods Inventory
 Normal Operating Cycle Average Age of Inventory + Average Age of Receivables
Net Credit Purchases
Trade Payables Turnover
Average Trade Payables
Average Age Of Trade It indicates the length of time during which
Payables payables remain unpaid.
360 days
( Payables Deferral Period)
Payables turnover
(Days’ Purchases In
Payables)
Cost of Sales + Operating It measures the movement and utilization of
Current Assets Turnover Expense ** current assets to meet operating requirements.
Average Current Assets

*In some accounting and finance texts, average inventory age is also called as the average sales period.
** These exclude depreciation, amortization and other expenses related to long- term assets.

 TEST OF SOLVENCY (Solvency refers to the ability of company to pay debts)

These ratios involve leverage ratios. ‘Leverage’ refers to how much of company’s resources are financed by debt and /or preferred equity, both of which require
fixed payment of interests and dividends.
Times Interest EBIT
It determines the extent to which operations cover interest expense.
Earned Interest Expense
Total Liabilities Proportion of assets provided by creditors compared to that
Debt-Equity Ratio
Total Equity provided by owners.
Total Liabilities
Debt Ratio Proportion of total assets provided by creditors
Total Assets
Total Equity
Equity Ratio Proportion of total assets provided by owners.
Total Assets
Income
Return on Sales Determine the portion of sales that went into company’s earnings
Net Sales
Income
Return on Assets Efficiency with which assets are used to operate the business
Average Assets

Issue: What INCOME figure should be used?

 If the intention is to measure operational performance, income is expressed as before interest and tax; alternatively, income before ‘after-tax’ interest may
used to exclude the effect of capital structure.
 If the intention is to evaluate total managerial effort, income is expressed after interest and tax.
  The practice of expressing income after interest but before tax is being discouraged.
 Income should include dividends and interest earned if the said investments are included in asset base.
 If used in the context of “DuPont” technique, income must be after interests, taxes and preferred stock dividends.
Return on Equity = Return on Sales x Assets Turnover x Equity
Multiplier

Income Measures the amount earned on the owner’s or

Return on Equity
Average Equity stockholder’s investment.
Net Income-Preferred
Earnings Per Dividends Measures the amount of net income earned by each
Share WA Common Shares common shares.
Outstanding

 MARKET TESTS
Price-Earnings (PE) Price Per Share
It indicates the number of pesos required to buy P1 of earnings
Ratio Earnings Per Share
Dividend Per Share Measures the rate of return in the investor’s common stock
Dividend Yield
Price Per Share investments.
Dividend Per Share
Dividend Pay out It indicates the proportion of earnings distributed as dividends.
Earnings Per Share

OTHER MEANINGFUL RATIOS

 RATIOS USED TO EVALUATE LONG-TERM FINANCIAL OR STABILITY
Measures the proportion of owner’s equity to
Fixed Assets To Fixed Assets fixed assets. Indicative of over or under
Total Equity Total Equity investment by owners and weakness in trading
on the equity*
Fixed Assets To Fixed Assets (NET) Indicates possible over- expansion of plant and
Total Assets Total Assets equipment
Sales To Fixed
Net Sales Tests roughly the efficiency of management in
Assets
Fixed Assets (NET) keeping plant properties employed.
(Plant Turnover)
Book Value Per Measures recoverable amount by common
Common shareholders’ equity
Share- stockholders in the event of liquidation if assets
Common Shares Outstanding
Common stock are realized at their book values
 Times Preferred Net Income After Taxes It indicates ability to provide dividends to
Dividend Earned Preferred Dividends preferred stockholder
Capital Intensity Total Assets Measures efficiency of the firm to generate sales
Ratio Net sales through employment of its resources.
Net income before taxes & fixed
Times Fixed charges
Measures ability to meet fixed charges.
Charges Earned (Fixed Charges + Sinking Fund
Payment)**
*Trading on the equity’ is another name for leverage
**Fixed charges shall include rent, interests and other relevant fixed expenses; sinking fund payment must be expressed before tax.

 TESTS OF OVER- ALL SHORT TERM SOLVENCY OR SHORT- TERM FINANCIAL POSITION
Working Capital Net Sale Indicates adequacy of working capital to support operation
Turnover Average Working Capital (sales)
Defensive Current Liabilities
Measures coverage of current liabilities
Interval Ratio Cash & Cash Equivalent
Payable Net Purchases Measures efficiency of the company in meeting the accounts
Turnover Average Accounts Payable payable
Fixed Assets to
Fixed Assets Reflects extent of the utilization of resources from long-term
Long-term
Long Term Liabilities debt. Indicative of sources of additional funds.
Liabilities

 RATIOS INDICATIVE OF INCOME POSITION

Rate of Return
Income
on Average Measures the profitability of current assets invested.
Average Current Assets
Current Assets
Operating Profit Operating Profit Measure profit generated after consideration of operating
Margin Net Sales costs.
Cash Flow Operating Cash Flow
Measures the ability of the firm to translate sales to cash.
Margin Net Sales
 Activities, Resources, and Assessment
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Management Accounting, Concepts and
Textbook: Management Accounting, Concepts and Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita Balatbat Cabrera.
Applications by: Ma. Elenita Balatbat Cabrera. Applications by: Ma. Elenita Balatbat Cabrera.

Activities: Activities: Activities:

Topic discussion will be through GoogleMeet App. Topic discussion will be through GoogleMeet App., Topic discussion will be during classroom meetups.
Such teleconferencing will be recorded, the video of
which will be made available to you via Messenger
Group Chat or Gmail address.

Assessment: Assessment: Assessment:

Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Topic quiz will be issued to you and will be answered
at home, which will be immediately due for submission
the following day at the box placed at the SVCI guard
house. Communication as to the receipt the said quiz
will be through text messaging.
Preliminary Term Major Examination
Time Duration and Allotment: 1 day
Online (Hybrid Model
Resources:
Schoology App
Assessment:
Preliminary Term Major Examination will be publish at
Schoology App. Instructions as to the time allocated for
answering and deadline for submission of assessment
will be announced via Messenger Group Chat.
Activities, Resources, and Assessment
Blended (Asynchronous Model)
Resources:
Schoology App
Assessment:
Preliminary Term Major Examination will be publish at
Schoology App. Instructions as to the time allocated for
answering and deadline for submission of assessment
will be announced via Messenger Group Chat.
Offline (Flex Model)
Assessment:
Preliminary Term Major Examination will be issued to
you and will be answered at home, which will be
immediately due for submission the following day at
the box placed at the SVCI guard house.
Communication as to the receipt the said quiz will be
through text messaging.
BASIC COST MANAGEMENT CONCEPTS; and COST BEHAVIOR PATTERNS
Time Duration and Allotment: Week 3; 6 hours

Abstract:
This lesson focuses on the presentation of the different terminologies used in the cost accounting and cost management; as well as the analysis of cost behavior patterns.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
 Explain the nature of cost, cost pools, cost objectives and cost drivers;
 Identify and explain the various classifications of costs; and
 Explain the basic cost behavior patterns.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

TOPIC CONTENT

 Cost- the monetary measures of the amount of resources given up or used for some purpose; the monetary value of goods and services expended to obtain current
or future benefits.

 SOME COST TERMS USED IN MANAGERIAL ACCOUNTING

COST OBJECT- anything for which cost is computed.

Examples: Product, product line, a segment of organization.

COST DRIVER- any variable, such as a level of activity or volume, that usually affects cost over a period of time.
Examples: Production, sales, number of hours

COST POOLS- a grouping of individuals cost items; an account in which a variety of similar cost are accumulated.

ACIVITY- an event, action, transaction, task or unit of work with a specified purpose.
 Value-Adding Activities- activities that are necessary (non-eliminable) to produce the products.
Example: Assembling the different components parts of the product.

Non-Value-Adding Activities- activities that do not make product or service more valuable to the customers.
Examples: Moving materials and equipment parts from/ to the stockroom or a workstation.

 CLASSIFICATIONS OF COSTS
A. Costs classified by Nature or Management Function
1. Manufacturing Costs These are all costs associated with production of goods.

- Direct materials All raw materials costs that become an integral part of the finished product and that can be conveniently and
economically assigned to specific units manufactured.

- Direct labor All labor costs related to time spent on products that can be conveniently and economically assigned to specific
units manufactured.

- Manufacturing overhead The third element of manufacturing costs, includes all costs of manufacturing except direct materials and direct
labor.

 Indirect materials Includes materials and supplies used in the manufacturing operation that do not become part of the product,
such as oil for the machinery and cleaning fluids for the custodian.

 Indirect labor Labor costs that cannot be identified or traced to specific units manufactured.

 Prime cost Direct materials and direct labor.

 Conversion cost Cost of converting or transforming raw material into finished products, i.e., direct labor and overhead.
2. Nonmanufacturing Costs Generally include costs related to selling and other activities not related to the production of goods.

- Marketing costs Include all costs associated with marketing or selling a product or all costs incurred by the marketing division
from the time the manufacturing process is completed until the product is delivered to the customer or all costs
necessary to secure customer orders and get the finished product or service into the hands of the customer.

Include all executive organizational and clerical costs associated with the general management of the
- General and administrative organization rather than with manufacturing, marketing or selling.
costs
B. Costs classified according to the Timing of Recognition of Expense
1. Product Costs Include all the costs that are involved in acquiring or making a product. Also called inventoriable costs, they
are costs that attach or cling to the units that are produced and are reported as assets until the goods are sold.
2. Period Costs All the costs that are identified with accounting periods and not included in the product costs.
C. Costs classification on Financial Statements
 Statement of Financial
Position

- Raw materials Are materials that are used to make a product.

- Work in process Consists of units of product that are only partially complete and will require further work before they are ready
for sale to a customer.

- Finished goods Consists of units of product that have been completed but have not yet been sold to customers.
 Income Statement

- Cost of goods sold Cost of the product sold

- Cost of goods manufactured Cost of product already finished from production within a given period. It contains the three elements of product
costs.
D. Cost classification for Predicting Cost Behavior
1. Variable costs Cost that change directly in proportion to changes in activity (volume).
2. Fixed costs Costs that remain unchanged for a given time period regardless of change in activity (volume).
3. Semivariable costs or mixed Costs that contain both fixed and variable elements.
costs
E. Costs classified by Types of Inventory
1. Raw materials inventory The cost of all raw materials and production supplies that have been purchased but not used at the end of the
period.
2. Work-in-process inventory The cost associated with goods partially completed at the end of the period.
3. Finished goods inventory Cost of completed that have not been sold at the end of the period.
F. Cost classification according to Traceability to Cost Objective
1. Direct costs (traceable; Cost that can be economically traced to a single cost object
separable)
2. Indirect costs Costs that are not directly traceable to the cost object
G. Cost classification according to Managerial Influence
1. Controllable cost Cost that is subject to influence by a particular manager within the time period under consideration.
2. Noncontrollable cost Cost over which a given manager does not have a significant influence.
H. Cost Terminologies Used for Planning and Control
1. Standard costs A predetermined cost estimate that should be attained; usually expressed in terms of costs per unit.
2. Budgeted costs Used to represent the expected/planned cost for a given period.
3. Absorption costing A costing method includes all manufacturing cost – direct materials, direct labor, and both variable and fixed
manufacturing overhead – in the cost of a unit of product. It is also referred to as the full cost method.
4. Direct costing A type of product costing where fixed costs are charged against revenue as incurred and are not assigned to
specific units of product manufactured. Also referred to as variable costing.
5. Information costs Costs of obtaining information.
6. Ordering costs Costs that increase with the number of orders placed for inventory.
7. Out-of-pocket costs Costs that must be met with a current expenditures or cash outlay.
I. Cost classification according to a Time-frame Perspective
1. Committed cost Cost that is inevitable consequence of a previous commitment.
2. Discretionary cost Costs for which the size or the time of incurrence is a matter of choice.
J. Costs classified according to Time Period for Which the Cost is Incurred
1. Historical costs Costs that were incurred in a past period.
2. Future costs Budgeted costs that are expected to be incurred in a future period.
K. Costs classification for Decision Making and other Analytical Purposes
1. Relevant costs Future costs that are different under one decision alternative than under another decision alternative.
2. Incremental costs The difference in cost between two or more alternatives. In evaluating a given alternative, incremental cost is
the additional revenue to determine the feasibility of this particular alternative.
3. Sunk costs Past costs that have been incurred and are irrelevant to a future decision.
4. Opportunity costs The value of the best alternative foregone as the result of selecting a different use of resource or by choosing a
particular strategy.
5. Avoidable costs Costs that can be eliminated (in whole or in part) as a result of choosing one alternative over another in a
decision making situation.
6. Marginal costs Costs associated with the next unit or the next project or incremental cost associated with an additional project
as opposed to the next discrete unit.
7. Value-added costs Costs that add value to the product. These costs result from activities that are necessary to satisfy the
requirements of the consumer.
  COST BEHAVIOR
Cost are usually classified according to their reaction to changes in activity like production. This classification of cost is proven to be useful and relevant in
management decision-making.

COST TOTAL AMOUNT PER UNIT AMOUNT

FIXED Constant Decrease as production increases
VARIABLE Increases as production increases Constant
MIXED Increase less proportionately (vs. total variable cost) as Decrease less proportionately (vs. fixed cost per unit) as
production increases production increases.

FIXED COST VS. VARIABLE COST

MIXED COST
(SEMI-VARIABLE COST)
Y= a + b X

Where : (Y) – the total cost (dependent variable)

(a) – the total fixed cost (y-intercept/vertical axis-intercept)
(b) – the variable cost per unit (slope of the line)
(X) – the activity or cost driver (independent variable)

 COST BEHAVIOR ASSUMPTIONS

Relevant Range Assumption
Relevant range refers to the range of activity within which the cost behavior patterns are valid. Any level of activity outside this range may show a different
cost behavior pattern.
Time Assumption
The cost behavior patterns identified are true only over a specified period of time. Beyond this, the cost may show a different cost behavior pattern.
Linearity Assumption
The cost is assumed to manifest a linear relationship over a relevant range despite its tendency to show otherwise over the long run.
 Activities, Resources, and Assessment
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Management Accounting, Concepts and
Textbook: Management Accounting, Concepts and Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita Balatbat Cabrera.
Applications by: Ma. Elenita Balatbat Cabrera. Applications by: Ma. Elenita Balatbat Cabrera.

Activities: Activities: Activities:

Topic discussion will be through GoogleMeet App. Topic discussion will be through GoogleMeet App., Topic discussion will be during classroom meetups.
Such teleconferencing will be recorded, the video of
which will be made available to you via Messenger
Group Chat or Gmail address.

Assessment: Assessment: Assessment:

Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Topic quiz will be issued to you and will be answered
at home, which will be immediately due for submission
the following day at the box placed at the SVCI guard
house. Communication as to the receipt the said quiz
will be through text messaging.
COST ESTIMATION METHODS
Time Duration and Allotment: Week 4; 6 hours

Abstract:
This lesson focuses on the methods of estimating the relation between costs and activity levels.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
 Compute the variable costs rate and fixed costs using the different methods; and
 Compare the strengths and weaknesses of the various costs estimation methods.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

TOPIC CONTENT

 COST ESTIMATION SEGREGATION OF MIXED COST INTO FIXED AND VARIABLE COST

1. Account Analysis Method- each account is classified as either fixed or variable based on experience and judgment of accounting and other qualified personnel
in the organization.

2. Industrial Engineering Method- based on the relationship between inputs and outputs in physical forms; engineering estimates indicate what and how much
cost should be.

3. Conference Method- cost are classified based on the opinions from various company departments such as purchasing, process engineering, manufacturing,
employee relations and so on.

4. HIGH-LOW POINTS METHOD The fixed and variable elements of the mixed cost are computed from two sampled data points the highest and the lowest
points as to activity level or cost driver.

Steps in Applying the High-Low Cost Estimation

 1. Obtain relevant data on past costs and related actual activity levels.

2. Estimate the variable cost per unit or rate using the following equation.

Cost at highest activity – Cost at lowest activity

Variable cost rate or variable cost per unit = ----------------------------------------------------------
Highest activity – Lowest activity

3. Compute the fixed costs as follows:

Fixed cost = Total cost at highest activity – [Variable cost per unit X Highest activity stated in units]

or

Fixed cost = Total cost at lowest activity – [Variable cost per unit X Lowest activity stated in units]

5. SCATTERGRAPH (SCATER DIAGRAM) METHOD All observed costs at various activity levels are plotted on a graph. Based on sound judgment, a
regression line is then fitted to the plotted points to represent the line function.

Steps involved in the use of Scattergraph are as follows:

1. On a graph, plot actual costs (on vertical axis) during the period under study against the volume levels (on horizontal axis).

2. The line of best fit is then drawn by visual inspection of the plotted points, the line representing the trend shown by the majority of the
points.

3. The fixed costs is estimated by extending the left end of the line to the vertical axis.

4. The variable cost rate or slope of the cost line is determined by dividing the difference between any two level of activities by the
difference in costs corresponding to the same level of activities.
 6. LEAST SQUARES REGRESSION METHOD A statistical technique that investigates the association between dependent and independent variables. This
method determines the line of best fit for a set of observations by minimizing the sum of the squares of the vertical deviations between actual points and the
regression line:
If there is only one independent variable, the analysis is known as SIMPLE REGRESSION (Y = a + bX).
If the analysis involves multiple independent variable, it is known as MULTIPLE REGRESSION (Y = a + b1X1 + b2X2 + b3X3 + … + u).

The equation for the determination of the straight line is: Y = a + bX.

The two linear equations that are used to solve for a and b are:

Equation 1: ΣY = Na + bΣX
Equation 2: ΣXY = ΣXa + bΣX2

Where:
Y = total cost
a = fixed cost
b = variable cost rate
X = measure of activity (e.g., hours, units)
N = number of observations
Σ = Greek letter signifying summation

 STRENGTHS AND WEAKNESSES OF COST ESTIMATION METHODS

METHODS STRENGTHS WEAKNESSES
Account analysis Provides a detailed expert analysis of the cost behavior Subjective
in each account
Engineering method Based on studies of what future costs should be rather Net particularly useful when the physical relation
than what past costs have been between inputs and outputs is indirect
High-low method Simple to apply Uses only two data points which may not produce
accurate results
Scattergraph method Uses all the observations of cost data. The fitting of the line to the observations is subjective.
Relatively easy to understand and apply. Difficult to do where several independent variables are
to be used.
Least squares regression method Uses all of the observations of cost data. The regression model requires that several relatively
The line is statistically fit to the observations. strict assumptions be satisfied for the results to be
A measure of the goodness of fit of the line to the valid.
observations is provided.
 Relatively easy to use with computers and
sophisticated calculators.

 CORRELATION ANALYSIS Measure of the co-variation between the dependent and independent variables. This is also used to measure the strength of linear
relationship between two or more variables. The correlation between two or variables can be seen by drawing a scatter diagram:
If the points seem to form a straight line, there is a high correlation.
If the points form a random pattern, there is a low correlation or no correlation at all.

 COEFFICIENT OF CORRELATION (r) – measures the relative strength of linear relationship between 2 variables. The range of the coefficient ‘r’ is from -1.0
to 1.0;
If r= -1.0, there is perfect inverse linear relationship between X and Y.
If r= 0, no linear relationship.
If r= +1.0, there is perfect direct relationship between X and Y.

Absolute value of r CORRELATION INTERPRETATION

0.90 to 1.00 Very high correlation
0.70 to 0.90 High correlation
0.40 to 0.70 Moderate correlation
0.20 to 0.40 Low correlation
0.00 to 0.20 Slight correlation

 COEFFICIENT OF DETERMINATION (r2) It is the proportion of the total variation in Y that is explained or accounted for by the regression equation, regardless
of whether the relationship between X and Y is direct or inverse. It is a measure of goodness of fit in the regression. The higher the r2 , the more confidence one can
have in the estimated cost formula.

Activities, Resources, and Assessment

Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Management Accounting, Concepts and
Textbook: Management Accounting, Concepts and Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita Balatbat Cabrera.
Applications by: Ma. Elenita Balatbat Cabrera. Applications by: Ma. Elenita Balatbat Cabrera.

Activities: Activities: Activities:

Topic discussion will be through GoogleMeet App. Topic discussion will be during classroom meetups.

Assessment:
Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Midterm Major Examination
Time Duration and Allotment: 1 day
Online (Hybrid Model
Resources:
Schoology App
Assessment:
Midterm Major Examination will be publish at
Schoology App. Instructions as to the time allocated for
answering and deadline for submission of assessment
will be announced via Messenger Group Chat.
Topic discussion will be through GoogleMeet App.,
Such teleconferencing will be recorded, the video of
which will be made available to you via Messenger
Group Chat or Gmail address.
Assessment:
Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Activities, Resources, and Assessment
Blended (Asynchronous Model)
Resources:
Schoology App
Assessment:
Midterm Major Examination will be publish at
Schoology App. Instructions as to the time allocated for
answering and deadline for submission of assessment
will be announced via Messenger Group Chat.
Assessment:
Topic quiz will be issued to you and will be answered
at home, which will be immediately due for submission
the following day at the box placed at the SVCI guard
house. Communication as to the receipt the said quiz
will be through text messaging.
Offline (Flex Model)
Assessment:
Midterm Major Examination will be issued to you and
will be answered at home, which will be immediately
due for submission the following day at the box placed
at the SVCI guard house. Communication as to the
receipt the said quiz will be through text messaging.
VARIABLE COSTING
Time Duration and Allotment: Week 5; 6 hours

Abstract:
This lesson focuses the distinction between absorption costing and variable costing.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
 Describe the nature of variable costing vis-à-vis absorption costing;
 Prepare income statement under variable costing and absorption costing; and
 Reconcile net income computed under absorption costing and net income computed under variable costing.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

TOPIC CONTENT

 Absorption Costing – is a costing method that includes all manufacturing costs – direct materials, direct labor, variable and fixed manufacturing overhead – in the
cost of a unit of product. It treats fixed manufacturing overhead (FFOH) as a product cost. It is also called as full costing.

 Variable Costing – is a costing method that includes only variable manufacturing costs – direct materials, direct labor, and variable manufacturing overhead – in
the cost of a unit of product. It treats FFOH as a period cost. It is also called direct costing.

 Product vs. Period Cost

A product cost is an inventoriable cost that is subject to allocation between sold and unsold units. Current income is reduced only by the amount allocated to
the sold units.
 Unsold units Asset (as Inventory)
Product cost
Sold units Expense (as Cost of Goods Sold)

A period cost is a cost that is charged as expense against income, regardless of the sales performance. No allocation is necessary so current income is reduced
by the full amount of the period cost.

Period cost Fully expensed in the period incurred

 Absorption vs. Variable Costing

Inventories
Under the variable costing, FFOH is treated as a period cost; while under absorption costing, it is treated as a product cost. Because of this treatment for FFOH,
the peso amount of inventories under variable costing is always smaller than inventories under absorption costing.

Rationale
Advocates of variable costing argue that fixed manufacturing costs are incurred in order to have the capacity to product output in a given period. These costs
are incurred whether or not the capacity is actually used to make output. Thus, FFOH, having no future service potential, should be charged against the period
and not included in the product cost.

Advocates of absorption costing believe that all manufacturing costs – variable and fixed – are essential to the production process and should not be ignored
when determining product costs.

Acceptability
Since treating FFOH as an inventoriable cost is consistent with accounting standards, only absorption costing is acceptable for financial reporting and tax
purposes. Variable costing, which violates the “matching principles”, is not acceptable for financial reporting and tax purposes.

Note: Matching principle is an accounting principle that calls for the recognition of expense by matching it with the related revenue in the same accounting
period. It supports the treatment of cost of sales as expenses only when related units have been already sold.

Income Statement
An income statement prepared under absorption costing distinguishes between production and other costs. Appropriate production costs are first deducted from
sales to arrive at gross profit, and then other costs are deducted to obtain income.
 Under the variable costing, the income statement distinguishes between variable and fixed costs. All variable costs are first deducted from revenue to arrive at
the contribution margin, and then fixed costs are deducted to obtain income.

Income Computation
Income computed by variable costing may differ from income computed by absorption costing because of the difference in the amount of FFOH recognized as
expense during an accounting period. This is due to variations between production and sales volume. In the long run, however, both methods would yield the
same results since sales cannot continuously exceed production, nor production can continuously exceed sales.

 Reconciliation of Income Under Absorption and Variable Costing

A. The cause of the difference between the income computed under absorption and variable costing is primarily a timing difference – when to recognize the
FFOH as an expense.

B. In variable costing, it is expensed when FFOH is incurred, while absorption costing, it is expensed in the period when the units to which such FFOH related
are sold.

C. The relationship between production and sales generally indicate the following income patterns:

1. When production is equal to sales, there is no change in inventory. FFOH expensed under absorption costing equals FFOH expensed under
variable costing.

Production = Sales Income (Absorption) = Income (Variable)

2. When production is greater than sales, there is an increase in inventory. FFOH expensed under absorption costing is less than FFOH expensed
under variable costing. Therefore, absorption income is greater than variable income.

Production > Sales Income (Absorption) > Income (Variable)

3. When production is less than sales, there is a decrease in inventory. FFOH expensed under absorption costing is greater than FFOH expensed
under variable costing.

Production < Sales Income (Absorption) < Income (Variable)

 D. Point of Reconciliation:
Income, Absorption costing xxx
Add: FFOH in beginning inventory xxx
Total xxx OR Income = Inventory x FFOH/u
Less: FFOH in ending inventory (xxx)
Income, Variable costing xxx

 Advantages of Using Variable Costing

1. Variable costing reports are simpler and more understandable.
2. The problems involved in allocating fixed costs are eliminated.
3. Data needed for break-even and cost-volume-profit analyses are readily available.
4. Variable costing is more compatible with the standard cost accounting system.
5. Variable costing reports provide useful information for pricing decisions and other decision-making problems encountered by management.

 Disadvantages of Using Variable Costing

1. This costing is not in accordance with GAAP; hence, it is not acceptable for external reporting.
2. Segregation of costs into fixed and variable might be difficult.
3. The matching principles is violated by using variable costing, which excludes FFOH from product costs and charges the same to period costs regardless of
production and sales.
4. With variable costing, inventory costs and other related accounts, such as working capital, current ratio, and acid-test ratio are understated because of the
exclusion of FFOH in the computation of product cost.

Activities, Resources, and Assessment

Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Management Accounting, Concepts and
Textbook: Management Accounting, Concepts and Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita Balatbat Cabrera.
Applications by: Ma. Elenita Balatbat Cabrera. Applications by: Ma. Elenita Balatbat Cabrera.

Activities: Activities: Activities:

Topic discussion will be through GoogleMeet App. Topic discussion will be through GoogleMeet App., Topic discussion will be during classroom meetups.
Such teleconferencing will be recorded, the video of
which will be made available to you via Messenger
Group Chat or Gmail address.
Assessment:
Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Assessment:
Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Assessment:
Topic quiz will be issued to you and will be answered
at home, which will be immediately due for submission
the following day at the box placed at the SVCI guard
house. Communication as to the receipt the said quiz
will be through text messaging.
COST-VOLUME-PROFIT RELATIONSHIPS
Time Duration and Allotment: Week 6; 6 hours

Abstract:
This lesson focuses on the relationship between the cost, sales volume and the profit derived from sales.

Lesson Objectives:
As a result of completing this learning module, students will be able to:
 Describe the concept and importance of cost-volume-profit relationship;
 Compute and explain the meaning of contribution margin, break-even point, margin of safety and operating leverage;
 State the assumptions and limitations of CVP analysis; and
 Apply CVP analysis in decision making.

Module Guide:

1. Study topic content presented below. (TOPIC CONTENT)

TOPIC CONTENT

 CVP Analysis – is useful for profit planning by way of a systematic analysis of the profit’s relationship with various costs and volume of sales.

FACTORS AFFECTING PROFIT

If there is an increase in… Then profit tends to…
1. Selling price Increase
2. Unit variable cost Decrease
3. Fixed cost Decrease
4. Volume (unit sales) Increase

In multi-product companies, a change in sales mix may also affect company profit.
 UNDERLYING CVP ASSUMPTIONS (Limitations)
 Relevant range, time and linearity assumptions are also assumed in CVP analysis.
 Unless indicated otherwise, unit selling price is constant even if sales volume changes.
 Inventories do not change significantly from period to period.
 In case of multi-product company, sales mix is constant.
 Labor productivity, production technology and market conditions remain stables.

 TERMS USED IN CVP ANALYSIS

Contribution Margin (CM) – is the difference between sales and variable cost. It is otherwise known as marginal income, profit contribution, contribution
to fixed cost or incremental contribution.
 CM Ratio = CM ÷ Sales = Unit CM ÷ Unit Selling Price
 CM Ratio = Δ CM ÷ Δ Sales
Note: the sign ‘Δ’ is used to mean change or difference.

Break-Even Point (BEP) – a level of activity, in units (break-even volume) or in pesos (break-even sales), at which total revenues equal total costs. At the
break- even point, there is neither a profit nor a loss.
 BEP Units = Fixed Costs ÷ CM per unit
 BEP Peso Sales = Fixed Costs ÷ CM per unit
 Unit Sales with Target Profit = (Fixed Costs + Desired Profit*) ÷ CM per Unit
 Peso Sales with Target Return on Sales = Fixed Costs ÷ (CM Ratio – Return on Sales)

*profit must be expressed before tax: Profit after tax ÷ (100% – Tax Rate)

Margin of Safety – the difference between actual sales and break- even sales. It indicates the maximum amount by which sales could decline without
incurring a loss.
 Margin of Safety = Sales – Breakeven
 Margin Of Safety Ratio = Margin of Safety ÷ Sales

Indifference Point – the level of volume at which two alternatives being analyzed would yield equal amount of total costs or profits
Alternative A Alternative B
 (Unit CM x Q) – Fixed Cost = (Unit CM x Q) – Fixed Cost
 Fixed Cost + (Unit VC x Q) = Fixed Cost + (Unit VC x Q)
Note: Q – number of units (indifference point)
 Sales Mix – the relative combination of quantities of sales of various products that make up the total sales of a company.
 Over-all BEP units = Fixed Cost ÷ Weighted Average CM per unit
 Over-all BEP peso sales = Fixed costs ÷ Weighted Average CM Ratio

Degree of Operating Leverage (DOL) – measures how percentage change in sales will affect company profits. It indicates how sensitive the company is
to sales volume increases and decreases. It is also known as operating leverage factor.
 DOL = Contribution Margin ÷ Profit before tax
 Δ% sales x DOL= Δ% profit before tax

Activities, Resources, and Assessment

Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Management Accounting, Concepts and
Textbook: Management Accounting, Concepts and Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita Balatbat Cabrera.
Applications by: Ma. Elenita Balatbat Cabrera. Applications by: Ma. Elenita Balatbat Cabrera.

Activities: Activities: Activities:

Topic discussion will be through GoogleMeet App. Topic discussion will be through GoogleMeet App., Topic discussion will be during classroom meetups.
Such teleconferencing will be recorded, the video of
which will be made available to you via Messenger
Group Chat or Gmail address.

Assessment: Assessment: Assessment:

Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Topic quiz will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of quiz will be announced via
Messenger Group Chat.
Topic quiz will be issued to you and will be answered
at home, which will be immediately due for submission
the following day at the box placed at the SVCI guard
house. Communication as to the receipt the said quiz
will be through text messaging.
Semi-Final Term Major Examination
Time Duration and Allotment: 1 day
Online (Hybrid Model
Resources:
Schoology App
Assessment:
Semi-Final Term Major Examination will be publish at
Schoology App. Instructions as to the time allocated for
answering and deadline for submission of assessment
will be announced via Messenger Group Chat.
Activities, Resources, and Assessment
Blended (Asynchronous Model)
Resources:
Schoology App
Assessment:
Semi-Final Term Major Examination will be publish at
Schoology App. Instructions as to the time allocated for
answering and deadline for submission of assessment
will be announced via Messenger Group Chat.
Offline (Flex Model)
Assessment:
Semi-Final Term Major Examination will be issued to
you and will be answered at home, which will be
immediately due for submission the following day at
the box placed at the SVCI guard house.
Communication as to the receipt the said quiz will be
through text messaging.
Review on the topic coverage from Preliminary Term to Semi-Final Term
Time Duration and Allotment: Week 7 and 8, 12 Hours

Activities, Resources, and Assessment

Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)

Resources: Resources: Resources:

Schoology App/Messenger Schoology App/Messenger Textbook: Management Accounting, Concepts and
Textbook: Management Accounting, Concepts and Textbook: Management Accounting, Concepts and Applications by: Ma. Elenita Balatbat Cabrera.
Applications by: Ma. Elenita Balatbat Cabrera. Applications by: Ma. Elenita Balatbat Cabrera.

Activities: Activities: Activities:

All learning materials in Schoology App of this course All learning materials in Schoology App of this course You are required to go over again all the learning
will be opened for access (i.e., reading materials, will be opened for access (i.e., reading materials, materials handed to you since Preliminary Term to
exercises, and quizzes). exercises, and quizzes). Semi-Final Term for review and study.

You are required to go over again all those learning You are required to go over again all those learning
materials for review and study. materials for review and study.
Final Term Major Examination
Time Duration and Allotment: 1 day
Online (Hybrid Model
Resources:
Schoology App
Assessment:
Final Term Major Examination (Comprehensive
Examination) will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of assessment will be
announced via Messenger Group Chat.
_End of module_
Activities, Resources, and Assessment
Blended (Asynchronous Model)
Resources:
Schoology App
Assessment:
Final Term Major Examination (Comprehensive
Examination) will be publish at Schoology App.
Instructions as to the time allocated for answering and
deadline for submission of assessment will be
announced via Messenger Group Chat.
Offline (Flex Model)
Assessment:
Final Term Major Examination will be issued to you
and will be answered at home, which will be
immediately due for submission the following day at
the box placed at the SVCI guard house.
Communication as to the receipt the said quiz will be
through text messaging.