Handout #1-

Management Accounting and the Business Environment

Management Accounting
 Involves the application of appropriate techniques and concepts to economic data so as to assist
management in establishing plans for reasonable economic objectives and the making of
rational decisions with a view toward achieving these objectives.

Scope of Management Accounting

 Scorekeeping or data accumulation
 Interpreting and reporting of information
 Problem-solving

Objectives of Management Accounting

 Planning, evaluating and controlling operations
 Safeguarding the organization’s assets
 Communicating with interested parties

Management Accounting VS. Financial Accounting

 As to Objectives:
MA: to provide data for internal users within the business organization.
FA: To provide data for both internal and external users
 As to compliance with GAAP
MA: reports need not be presented in conformity w/ GAAP
FA: Should be in accordance with GAAP
 As to emphasis on the future:
MA: has a strong future orientation
FA: provides summaries of past financial transaction.
 As to precision and timeliness:
MA: Timeliness is often more important than precision.
FA: reports are still useful even if submitted late.
 As to compliance with law:
MA: this is not mandatory
FA: required by law. BIR, SEC and other governmental entities.

Controllership
 Is the practice of the established science of control which the is the process by which
management assures itself that the resources are procured and utilized according to plans in
order to achieve the company’s objectives.

Controller
 Chief accounting executive of an organization
 Comptroller
 Understanding the Financial Statements
 Financial Statements
 Contain a wealth of useful information regarding the financial position of a company, the
success of its operations, the policies and strategies of management, and insight into its future
performance.
 Financial Statements
 How well does the company compete in its operating environment?
 Would an investment generate attractive returns?
 Should existing investment holdings be continued or liquidated?
 Will cash flows be sufficient to meet interest and principal payments?

Basic Financial Statements

 Balance Sheet
 Income statement
 Statement of retained earnings
 Statement of cash flow

Balance Sheet
 Shows the financial position- assets, liabilities and owner’s equity of the firm on a particular
date.

Gilbert Company
Balance Sheet
December 31, 2000
ASSETS: LIABILITIES AND CAPITAL
Cash 150,000 Accounts Payable 140,000
Accounts Receivable 220,000 Taxes Payable 156,000
Inventories 592,000 current portion LT debts 83,000
Other current assets 23,000
Total current 985,000 total current 379,000
PPE 2,475,000 Capital stock 350,000
Less: Acc. Dep 850,000 Retained Earnings 1,305,000
Total Assets 2,610,000 Total Equities 2,610,000
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Current Assets:
Cash and those assets expected to be converted into cash, used or consumed within one year or one
operating cycle whichever is longer.
 Cash- coins and bills awaiting deposit or in a bank account.
 Accounts Receivable- customer balances outstanding on credit sales.
 Inventories- items held for sale or used in the manufacturing of products.
 Prepaid expenses- certain expense, such as insurance, taxes, utilities paid in advance.
 Property Plant and Equipment and other non-current assets:
Fixed assets of the company that are not consumed in annual business operations.

Current Liabilities:
Claims against assets that must be satisfied in one year or one operating cycle, whichever is longer.
 Balance Sheet
 Accounts Payable- short-term obligations that arise from credit extended by suppliers for the
purchase of goods and services.
 Notes payable- short-term obligations in the form of promissory notes.
 Accrued liabilities- result from the recognition of an expense in the accounting records prior to
the actual payment of cash.
 Long-term debt and other liabilities
-obligations with maturities beyond one year.

Stockholder’s equity/Capital
- Ownership interest in the company.
• Stocks
• Additional paid in capital
• Retained earnings

Income Statement
 Represents the results of operations – revenues, expenses, net profit or loss, for the accounting
period.
 Net sales- sales revenues
 Costs of goods sold- cost to the seller of the products sold to customers.
 Gross profit- difference between sales and COGS
 Operating Expenses- selling and administrative expenses
 Operating Profit- measures the overall performance of the company

II- Cost Concepts

Cost Behavior- refers to how a cost reacts to changes in the level of activity. As the activity level rises
and falls, a particular cost may rise and fall as well—or it may remain constant.

1. Variable Cost
A variable cost varies, in total, in direct proportion to changes in the level of activity.
Common examples of variable costs include cost of goods sold for a merchandising
company, direct materials, direct labor, variable elements of manufacturing overhead
such as indirect materials, supplies and power; variable selling and administrative
expenses.

Example:
CDO, a small company that provides whitewater rafting excursions on rivers in Cagayan
de Oro. The company provides all of the necessary equipment and experienced guides, and it serves
gourmet meals to its guests. The meals are purchased from a caterer for P30.00 a person for a daylong
excursion. The behavior of this variable cost, on both a per unit and a total basis, is shown below:

Number of Guests Cost of Meals per Guest Total Cost of Meals

250 P30.00 P7,500
500 P30.00 P15,000
750 P30.00 P22,500
1,000 P30.00 P30,000

2. Fixed Cost
Cost that remains constant, in total, regardless of changes in the level of activity.
Example of fixed costs include straight-line depreciation, insurance, property taxes.

Example:
 If CDO has only 250 guests in a month, the P500 fixed rental cost would amount to an
average of P2.00 per guest. If there are 1,000 guests, the fixed rental cost would average only 50 cents
per guest.

Monthly Rental Cost Number of Guests Average Cost per Guest

P500 250 P2.00
P500 500 P1.00
P500 750 P0.67
P500 1,000 P.050

3. Mixed Cost
Contains both variable and fixed cost elements; Also known as semivariable cost.
Example:
CDO company incurs a mixed cost called fees paid to the City Hall. It includes a license
fee of P25,000 per year plus P3.00 per rafting party paid to the DENR. If the company runs 1,000
rafting parties this years, then the total fees paid to the City Hall would be P28,000, made up of
P25,000 in fixed cost plus P3,000 in variable cost.

Equation: Y= a + bX

Where: Y= total mixed cost

a= total fixed cost
b= variable cost per unit of activity
X=the level of activity

Segregating Mixed Cost:

1. High-Low Method
Cost at the high activity level – Cost at the low activity level
High activity level-low activity level

Variable cost= Change in cost

Change in activity