Professional Documents
Culture Documents
WARM-UP (PRE-ACTIVITY)
Locate the words in the grid by encircling at least 20 words related to managerial
accounting or financial accounting.
WORD PUZZLE
A E R U T U F C G J A D F A E
D F G H J U O D K A K A O O D
P A T A K A E O S D E X I F D
G N I L L E S I D F G M D D Y
N A E E T O T R S Q W E I D H
I S D E L D E E E C A S D R E
L E E A D B R P S E I E A E P
L A D S D E A D D D R H E A E
O X C O N D E I F O O A T E A
R A S E D E S E R R D O D E T
T C U D O R P A S A E S G V I
N P A G S U R X B A V A S A O
O L S E E O D A E H R E V O L
C A S A K U A T A L A N G K A
H I E S N I R T C E R I D N I
A C C D U W E O U I E O E U Q
H N O C S E R S E A V U B O W
A A R V E E E P T E R O I A R
T N P C O N L R E W T R E N L
A I E C E A O A E R W S O I R
K F U A N E W R S W S A O F M
A O O N E E M O C N I F E C N
K U I Q W R T Y U I F D D A D
A N E R M K T C E R I D A S E
G D W E T O I J H G F D S A S
SELF-EVALUATION
After performing the word puzzle in the Warm-up Section, evaluate yourself by
placing a check mark on the column that best describes your ability to familiarize the
cost terms. There are no wrong answers in this section, so answer as objectively as
possible.
Usually Sometimes Seldom Never
3 2 1 0
I am able to identify terms related to
managerial accounting or financial accounting.
I avoid confusing managerial accounting or
financial accounting cost terms from other
accounting terminologies.
TOTAL
CHAPTER 1
FUNDATION MANAGERIAL ACCOUNTING AND ETHICAL STANDARDS
MANAGERIAL ACCOUNTING
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Managerial accounting makes use of standard costing, budgetary control, project appraisal and
other techniques and concepts which makes the provided accounting information to be more
relevant for decision making.
SIGNIFICANCE OF MANAGERIAL ACCOUNTING
1. Managerial accounting basically provides information on various things like cost, financial
gains, specialized i.e., non-technical language and so on which is needed by the management for
carrying out the business operations.
2. Managerial accounting highlights and displays the accounting information in a manner which
helps the management in policy making process.
3. Managerial accounting is actually much more than numbers which does not need any
explanation and can be clearly and easily understood.
4. Managerial accounting is an expansion of the cost accounting concepts. It makes use of those
rules and methods which are used in cost and financial accounting.
The goal of managerial accounting is to provide the information they need for planning,
control, and decision making. If your goal is to be an effective manager, a thorough
understanding of managerial accounting is essential.
1. Planning
Planning is a key activity for all companies. A plan communicates a company’s goals to
employees aiding coordination of various functions, such as sales and production. A plan also
specifies the resources needed to achieve company goals.
2. Control
Control of organizations is achieved by evaluating the performance of managers and the
operations for which they are responsible. The distinction between evaluating managers and
evaluating the operations they control is important. Managers are evaluated to determine how
their performance should be rewarded or punished, which in turn motivates them to perform at a
high level. Based on an evaluation indicating good performance, a manager might receive a
substantial bonus. An evaluation indicating a manager performed poorly might lead to the
manager being fired. In part because evaluations of managers are typically tied to compensation
and promotion opportunities, managers work hard to ensure that they will receive favorable
evaluations.
Performance Reports for Control. The reports used to evaluate the performance of managers
and the operations they control are referred to as performance reports.
3. Decision Making
Perhaps the most basic managerial skill is the ability to make intelligent, data-driven decisions.
Broadly speaking, many of those decisions revolve around the following three questions. What
should we be selling? Who should we be serving? How should we execute?
Decision making is an integral part of the planning and control process—decisions are made to
reward or punish managers, and decisions are made to change operations or revise plans.
MANAGERIAL ACCOUNTING
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4
(b) Assists management in achieving future goals by providing past performance record.
(c) Helps in planning the short term budget for the concern.
(d) Preparing master budget and presents it for approval to top management.
2. Controlling
The Management Accountant helps in;
(a) Preparing performance reports of every responsibility center in order to control the
performance-of the organization.
b) Identify the areas that do not go along with plans and recognize weak and troubling points, so
that top management can take necessary steps.
3. Organizing
Organizing is the function of management which follows planning. Management Accountant use
responsibility accounting system to represent the design and implementation of accounting
system to have better definition and consideration.
4. Communicating
Management Accountant use budget and performance reports for the purpose of communication.
5. Motivating
Both budgets and performance reports motivate the personnel of the organization. Budgets
encourage managers in achieving targets and performance reports encourage the personnel.
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CONTROLLER FUNCTION
The controller functions are as follows,
1. He should create, manage and control the plans which helps in estimating sales, expenses,
budgets and standards that allows profit planning, capital budgeting and financing.
2. He should prepare accounting policy and procedures which also includes submission of
operating data and special reports and comparison of performance with plans and standards.
Comparison enables management properly assign responsibility and evaluate functional and
divisional heads.
3. He should protect the assets of the business from external controls, internal auditing and
insurance coverage.
4. He should design tax policies and procedures to manage the reports that are needed by
different authorities.
5. He should be aware of all economic and social forces and impact of policies and actions of
governments affecting business activities.
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PRINCIPLES
IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and
Responsibility. Members shall act in accordance with these principles and shall encourage others
within their organizations to adhere to them.
STANDARDS
A member’s failure to comply with the following standards may result in disciplinary action.
I. COMPETENCE
Each member has a responsibility to:
1. Maintain an appropriate level of professional expertise by continually developing knowledge
and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and technical
standards.
3. Provide decision support information and recommendations that are accurate, clear, concise,
and timely.
4. Recognize and communicate professional limitations or other constraints that would preclude
responsible judgment or successful performance of an activity
II. CONFIDENTIALITY
Each member has a responsibility to:
1. Keep information confidential except when disclosure is authorized or legally required.
2. Inform all relevant parties regarding appropriate use of confidential information. Monitor
subordinates’ activities to ensure compliance.
3. Refrain from using confidential information for unethical or illegal advantage.
III. INTEGRITY
Each member has a responsibility to:
1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid
apparent conflicts of interest. Advise all parties of any potential conflicts.
2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
3. Abstain from engaging in or supporting any activity that might discredit the profession.
IV. CREDIBILITY
Each member has a responsibility to:
1. Communicate information fairly and objectively.
2. Disclose all relevant information that could reasonably be expected to influence an intended
user’s understanding of the reports, analyses, or recommendations.
3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in
conformance with organization policy and/or applicable law.
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Corporate Governance
Corporate governance refers to the system of policies, processes, laws, and regulations that
affect the way a company is directed and controlled. At the highest level, the system of
corporate governance for a company is the responsibility of the board of directors, but it affects
all stakeholders, including employees, creditors, customers, vendors, and the community at
large. The large number of corporate failures of the last decade brought the topic of corporate
governance to the forefront.
Corporate Social Responsibility
Closely related to the concepts of ethics and corporate governance is the topic of corporate
social responsibility, which can simply be defined as being a good corporate citizen. It entails
balancing the objective of profitability with the objective of giving proper attention to issues
such as environmental sustainability and energy conservation, and avoiding actions that would
lower the quality of life in the communities in which a company operates and sells its products
or services. In earlier generations it would have meant giving a day’s wage for a day’s labor, not
hiring underage children, or not dumping untreated waste into the local river.
Being a socially responsible company does not mean abandoning the profit motive or the goal of
providing an attractive return to investors. It means that while pursuing these essential
objectives, a for-profit company attempts to measure the total benefits and costs of its actions
and accepts the responsibility for those actions. Also, being a good competitor should not be
confused with social responsibility. For example, many companies offer certain fringe benefits,
such as on-site childcare, because it attracts better employees, not because they feel they have a
social responsibility to provide such services.
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I. MULTIPLE CHOICE:
ENCIRCLE the best answer of your choice of the following questions.
1. _________ is the presentation of accounting information in such a way as to assist
management in the creation of policy and the day-to-day operation of an undertaking.
(a) Cost Accounting (b) Financial Accounting
II. IDENTIFICATION:
1. Refers to the system of policies, processes, laws, and regulations that affect the way a
company is directed and controlled. _______________________
2. Closely related to the concepts of ethics and corporate governance or which can simply be
defined as being a good corporate citizen. _____________________
3. Deals with the moral quality, fitness, or propriety of a course of action that can injure or
benefit people._________________________
4. The most basic managerial skill is the ability to make intelligent, data-driven decisions.
_________________________
5. Is achieved by evaluating the performance of managers and the operations for which they are
responsible._________________________
6. Is the presentation of accounting information in such a way as to assist management in the
creation of policy and the day-to-day operation of an
undertaking.____________________________
7. It mainly deals with the historical data. _________________________
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8. Both budgets and performance reports motivate the personnel of the organization.
_________________________
9. An ethical standard that communicate information fairly and objectively.
_________________________
10. An ethical standard that abstain from engaging in or supporting any activity that might
discredit the profession. ________________________
III. TRUE OR FALSE.
Write the word TRUE if the statement is correct. Write the word FALSE if the statement
is wrong and underline the word/s that makes it incorrect.
1. Organizing is the function of management which follows controlling. __________________
2. Integrity is an ethical standards that each member has a responsibility to keep information
confidential except when disclosure is authorized or legally required.
______________________
3. Corporate social responsibility refers to the system of policies, processes, laws, and
regulations that affect the way a company is directed and
controlled.____________________________
4. Credibility as an ethical standard has a responsibility to refrain from engaging in any conduct
that would prejudice carrying out duties ethically. _______________________
5. Financial accounting helps the management in policy formulation and in taking decisions
about the future activities of the firm. ______________________
6. Managerial accounting follows only some accounting principles and standards.
_____________________
7. Ethnics deals with the moral quality, fitness, or propriety of a course of action that can injure
or benefit people. _______________________
8. Problem solving is an integral part of the planning and control process—decisions are made to
reward or punish managers, and decisions are made to change operations or revise plans.
______________________
9. Identify the areas that do not go along with plans and recognize weak and troubling points, so
that top management can take necessary steps is part of planning function.
____________________________
10. Managerial accounting is the presentation of accounting information in such a way as to
assist management in the creation of policy and the day-to-day operation of an undertaking.
__________________
IV. IDENTIFICATION
Required: Identify the statements and phrases from the following list that are primarily relevant
to managerial accounting, as opposed to financial accounting:
1. Preparing periodic financial statements
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CHAPTER 2
Cost Concepts, Classification, Patterns and Behaviour
2.1INTRODUCTION
In accounting, costs can be classified differently depending on the needs of management. For
example, the Prologue mentioned that financial accounting is concerned with reporting financial
information to external parties, such as stockholders, creditors, and regulators. In this context,
costs are classified in accordance with externally imposed rules to enable the preparation of
financial statements. Conversely, managerial accounting is concerned with providing
information to managers within an organization so that they can formulate plans, control
operations, and make decisions. In these contexts, costs are classified in diverse ways that enable
managers to predict future costs, to compare actual costs to budgeted costs, to assign costs to
segments of the business (such as product lines, geographic regions, and distribution channels),
and to properly contrast the costs associated with competing alternatives.
Costs are assigned to cost objects for a variety of purposes including pricing, preparing
profitability studies, and controlling spending. A cost object is anything for which cost data are
desired—including products, customers, and organizational subunits.
• Manufacturing costs
• Direct materials
• Direct labor
• Manufacturing overhead
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• Nonmanufacturing costs
• Selling costs
• Administrative costs
5. Making decisions
• Differential cost (differs between alternatives)
• Sunk cost (should be ignored)
• Opportunity cost (foregone benefit)
Direct Cost
A direct cost is a cost that can be easily and conveniently traced to a specified cost object.
Indirect Cost
An indirect cost is a cost that cannot be easily and conveniently traced to a specified cost object.
Manufacturing Costs
Most manufacturing companies further separate their manufacturing costs into two direct cost
categories, direct materials and direct labor, and one indirect cost category, manufacturing
overhead/factory overhead.
Direct Materials
Direct materials refers to raw materials that become an integral part of the finished product and
whose costs can be conveniently traced to the finished product.
The materials that go into the final product are called raw materials. This term is somewhat
misleading because it seems to imply unprocessed natural resources like wood pulp or iron ore.
Actually, raw materials refer to any materials that are used in the final product; and the finished
product of one company can become the raw materials of another company.
Direct Labor
Direct labor consists of labor costs that can be easily traced to individual units of product. Direct
labor is sometimes called touch labor because direct labor workers typically touch the product
while it is being made.
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Note: Managers occasionally refer to their two direct manufacturing cost categories as prime
costs. Prime cost is the sum of direct materials cost and direct labor cost.
Manufacturing Overhead
Manufacturing overhead, the third manufacturing cost category, includes all manufacturing costs
except direct materials and direct labor. For example, manufacturing overhead includes a
portion of raw materials know as indirect materials as well as indirect labor. Manufacturing
overhead also includes other indirect costs that cannot be readily traced to finished products
such as depreciation of manufacturing equipment and the utility costs, property taxes, and
insurance premiums incurred to operate a manufacturing facility. Although companies also incur
depreciation, utility costs, property taxes, and insurance premiums to sustain their
nonmanufacturing operations, these costs are not included as part of manufacturing overhead.
Only those indirect costs associated with operating the factory are included in manufacturing
overhead.
Indirect materials are raw materials, such as the glue used to assemble a chair, whose costs
cannot be easily or conveniently traced to finished products.
Nonmanufacturing Costs
Nonmanufacturing costs are often divided into two categories: (1) selling costs and (2)
administrative costs.
Selling costs include all costs that are incurred to secure customer orders and get the finished
product to the customer. These costs are sometimes called order-getting and order-filling costs.
Examples of selling costs include advertising, shipping, sales travel, sales commissions, sales
salaries, and costs of finished goods warehouses. Selling costs can be either direct or indirect
costs.
For example, the cost of an advertising campaign dedicated to one specific product is a direct
cost of that product, whereas the salary of a marketing manager who oversees numerous
products is an indirect cost with respect to individual products.
Administrative costs include all costs associated with the general management of an
organization rather than with manufacturing or selling. Examples of administrative costs include
executive compensation, general accounting, secretarial, public relations, and similar costs
involved in the overall, general administration of the organization as a whole.
Note: Nonmanufacturing costs are also often called selling, general, and administrative (SG&A)
costs or just selling and administrative costs.
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Product Costs
For financial accounting purposes, product costs include all costs involved in acquiring or
making a product. Product costs “attach” to a unit of product as it is purchased or manufactured
and they stay attached to each unit of product as long as it remains in inventory awaiting sale.
When units of product are sold, their costs are released from inventory as expenses (typically
called cost of goods sold) and matched against sales on the income statement. Because product
costs are initially assigned to inventories, they are also known as inventoriable costs.
For manufacturing companies, product costs include direct materials, direct labor, and
manufacturing overhead. A manufacturer’s product costs flow through three inventory
accounts on the balance sheet—Raw Materials, Work in Process, and Finished Goods—prior to
being recorded in cost of goods sold on the income statement. Raw materials include any
materials that go into the final 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 the
customer. Finished goods consist of completed units of product that have not yet been sold to
customers.
Period Costs
Period costs are all the costs that are not product costs.All selling and administrative expenses
are treated as period costs. For example, sales commissions, advertising, executive salaries,
public relations, and the rental costs of administrative offices are all period costs. Period costs
are not included as part of the cost of either purchased or manufactured goods; instead, period
costs are expensed on the income statement in the period in which they are incurred using the
usual rules of accrual accounting. Keep in mind that the period in which a cost is incurred is not
necessarily the period in which cash changes hands. For example, as discussed earlier, the cost
of liability insurance is spread across the periods that benefit from the insurance—regardless of
the period in which the insurance premium is paid.
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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. For
planning purposes, a manager must be able to anticipate which of these will happen; and if a
cost can be expected to change, the manager must be able to estimate how much it will change.
To help make such distinctions, costs are often categorized as variable, fixed, or mixed. The
relative proportion of each type of cost in an organization is known as its cost structure. For
example, an organization might have many fixed costs but few variable or mixed costs.
Alternatively, it might have many variable costs but few fixed or mixed costs.
MANAGERIAL ACCOUNTING
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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, and variable elements of selling and administrative expenses, such as
commissions and shipping costs.
For a cost to be variable, it must be variable with respect to something. That “something” is its
activity base. An activity base is a measure of whatever causes the incurrence of a variable cost.
An activity base is sometimes referred to as a cost driver. Some of the most common activity
bases are direct labor-hours, machine-hours, units produced, and units sold.
To provide an example of a variable cost, consider Bukidnon Travel and Tours a small company
that provides daylong whitewater rafting excursions on rivers in the KitangladMountains. 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 a person for a daylong
excursion. The behavior of this variable cost, on both a per unit and a total basis, is shown
below:
While total variable costs change as the activity level changes, it is important to note that a
variable cost is constant if expressed on a per unit basis. For example, the per unit cost of the
meals remains constant at P30 even though the total cost of the meals increases and decreases
with activity. The table above illustrates that the total variable cost rises and falls as the activity
level rises and falls. At an activity level of 250 guests, the total meal cost is P7,500. At an
activity level of 1,000 guests, the total meal cost rises to P30,000.
Fixed Cost
A fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity.
Manufacturing overhead usually includes various fixed costs such as depreciation, insurance,
property taxes, rent, and supervisory salaries. Similarly, selling and administrative costs often
include fixed costs such as administrative salaries, advertising, and depreciation of
nonmanufacturing assets. Unlike variable costs, fixed costs are not affected by changes in
activity. Consequently, as the activity level rises and falls, total fixed costs remain constant
unless influenced by some outside force, such as a landlord increasing your monthly rent.
To continue the Bukidnon Travel and Tours example, assume the company rents a building for
P5000 per month to store its equipment. The total amount of rent paid is the same regardless of
the number of guests the company takes on its expeditions during any given month.
Because total fixed costs remain constant for large variations in the level of activity, the average
fixed cost per unit becomes progressively smaller as the level of activity increases. If Bukidnon
Travel and Tours has only 250 guests in a month, the P5000 fixed rental cost would amount to
an average of P20 per guest. If there are 1,000 guests, the fixed rental cost would average only
MANAGERIAL ACCOUNTING
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P5 per guest. The table below illustrates this aspect of the behavior of fixed costs. Note that as
the number of guests increase, the average fixed cost per guest drops.
Note: As a general rule, we caution against expressing fixed costs on an average per unit basis
in internal reports because it creates the false impression that fixed costs are like variable costs
and that total fixed costs actually change as the level of activity changes.
For planning purposes, fixed costs can be viewed as either committed or discretionary.
Committed fixed costs represent organizational investments with a multiyear planning horizon
that can’t be significantly reduced even for short periods of time without making fundamental
changes. Examples include investments in facilities and equipment, as well as real estate taxes,
insurance premiums, and salaries of top management.
Discretionary fixed costs (often referred to as managed fixed costs) usually arise from annual
decisions by management to spend on certain fixed cost items. Examples of discretionary fixed
costs include advertising, research, public relations, management development programs, and
internships for students.
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production of
printers at
Hewlett-Packard
Commissions paid x x
to Encyclopedia
Britannica
salespersons
Depreciation of x x
factory lunchroom
facilities at a
General Electric
plant
Steering wheels x x
installed in BMWs
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Mixed Costs
A mixed cost contains both variable and fixed cost elements. Mixed costs are also known as
semi-variable costs. Examples of social security taxes, material handling, personnel services,
heat, light, and power. These cost elements must be divided into their proper element.
The relationship between mixed cost and the level of activity also be expressed in the following
equations:
Y = a + bX
In this equation,
Y = The total mixed cost
a = The total fixed cost (the vertical intercept of the line)
b = The variable cost per unit of activity (the slope of the line)
X = The level of activity
The independent variable is called also the explanatory variable or cost driver. In cost
estimation, we identify some independent variable (the activity) and the functional relationship
that permit computation of the corresponding value of the dependent variable (the cost).
The High-Low Method
The High-Low Method of analyzing mixed costs is based on costs observed at both the high and
low levels of activity within the relevant range. The idea is management go about in estimating
the fixed and variable components of the mixed cost.
Steps in Applying the High-Low Cost Estimation
1. Obtain relevant data on past coasts and related actual activity levels.
2. Estimate the variable cost per unit or rate using the following equation.
Variable cost rate or per unit= Cost at highest activity – Cost at lowest activity
Highest activity – Lowest activity
3. Fixed cost = Total Cost at highest activity – (Variable cost per unit x Highest activity
stated in units)
Fixed cost = Total Cost at lowest activity – (Variable cost per unit x Lowest activity
stated in units)
Sample Problem:
Data for the past 10 months were collected for Jopams Inc. to estimate the variable and fixed
manufacturing overhead.
The following data on supplies cost and direct labor hours from January to October are
available.
X Y
Direct Labor Supplies Cost
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Hours
20 50
40 110
60 150
20 70
30 80
40 100
50 150
10 60
30 110
50 120
REQUIRED:
Determine the variable cost rate per hour and the fixed cost portion using high-low
method.
SOLUTION:
1. Variable cost rate per hour = P150 – P60
60-10
= P90
50
= P1.80
2. FIXED COST:
At 60-hour level At 10-hour level
Cost Terminology
To improve your understanding of some of the definitions and concepts introduced so far,
consider the following scenario. A company has reported the following costs and expenses for
the most recent month:
(The following amount are assumed to be in terms of Philippine Peso)
Direct materials 69,000
Direct labor 35,000
Variable manufacturing overhead 15,000
Fixed manufacturing overhead 28,000
Total manufacturing overhead 43,000
Variable selling expense 12,000
Fixed selling expense 18,000
Total selling expense 30,000
Variable administrative expense 4,000
Fixed administrative expense 25,000
Total administrative expense 29,000
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These costs and expenses can be categorized in a number of ways, some of which are shown
below:
Total fixed cost = Fixed manufacturing + Fixed selling + Fixed administrative overhead
expense expense
= 28,000 + 18,000 + 25,000
= 71,000
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Opportunity costs are not usually found in accounting records, but they are costs that must be
explicitly considered in every decision a manager makes. Virtually every alternative involves an
opportunity cost.
The Traditional Format Income Statement
This type of income statement organizes costs into two categories—cost of goods sold and
selling and administrative expenses. Sales minus cost of goods sold equals the gross margin. The
gross margin minus selling and administrative expenses equals net operating income.
The cost of goods sold reports the product costs attached to the merchandise sold during the
period. The selling and administrative expenses report all period costs that have been expensed
as incurred. The cost of goods sold for a merchandising company can be computed directly by
multiplying the number of units sold by their unit cost or indirectly using the equation below:
NOTE: Cost of goods sold = Beginning merchandise inventory + Purchases – Ending
merchandise inventory
For example, let’s assume that the company purchased P3,000 of merchandise inventory during
the period and had beginning and ending merchandise inventory balances of P7,000 and P4,000,
respectively. The equation above could be used to compute the cost of goods sold as follows:
Cost of goods sold = Beginning merchandise inventory + Purchases – Ending merchandise
inventory
= 7,000 + 3,000 – 4,000
= 6,000
Although the traditional income statement is useful for external reporting purposes, it has
serious limitations when used for internal purposes. It does not distinguish between fixed and
variable costs. For example, under the heading “Selling and administrative expenses,” both
variable administrative costs (400) and fixed administrative costs (P1,500) are lumped together
(P1,900). Internally, managers need cost data organized by cost behavior to aid in planning,
controlling, and decision making. The contribution format income statement has been developed
in response to these needs.
Comparing Traditional and Contribution Format Income Statements for Merchandising
Companies (all numbers are given)
(The following amount are assumed to be in terms of Philippine Peso)
Traditional Format
Sales 12,000.00
Less: Cost of goods sold* 6,000.00
Gross margin 6,000.00
Selling and administrative expenses:
Selling 3,100.00
Administrative 1,900.00 5,000.00
1,000.00
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*For a manufacturing company, the cost of goods sold would include some variable costs, such
as direct materials, direct labor, and variable overhead, and some fixed costs, such as fixed
manufacturing overhead. Income statement formats for manufacturing companies will be
explored in greater detail in a subsequent chapter.
Contribution Format
Sales 12,000
Variable expenses:
Cost of goods sold 6,000.00
Variable selling 600.00
Variable administrative 400.00 7,000
Contribution margin 5,000
Fixed expenses:
Fixed selling 2,500.00
Fixed administrative 1,500.00 4,000.00
Net operating income 1,000.00
The crucial distinction between fixed and variable costs is at the heart of the contribution
approach to constructing income statements. The unique thing about the contribution approach is
that it provides managers with an income statement that clearly distinguishes between fixed and
variable costs and therefore aids planning, controlling, and decision making.
The contribution approach separates costs into fixed and variable categories, first deducting all
variable expenses from sales to obtain the contribution margin. For a merchandising company,
cost of goods sold is a variable cost that gets included in the “Variable expenses” portion of the
contribution format income statement. The contribution margin is the amount remaining from
sales revenues after all variable expenses have been deducted. This amount contributes toward
covering fixed expenses and then toward profits for the period.
The contribution format income statement is used as an internal planning and decision-making
tool. Its emphasis on cost behavior aids cost-volume-profit analysis, management performance
appraisals, and budgeting. Moreover, the contribution approach helps managers organize data
pertinent to numerous decisions such as product-line analysis, pricing, use of scarce resources,
and make or buy analysis.
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Income statement
Sales -
Less: Cost of goods sold -
Gross margin -
Less: Administrative expenses -
Selling expenses -
Net operating income -
TRUE/FALSE QUESTIONS:
Write the word TRUE if the statement is correct and FALSE if the statement is wrong.
MANAGERIAL ACCOUNTING
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3. Rent on a factory building used in the production process would be classified as a period cost
and as a fixed cost.
4. Period costs are found only in manufacturing companies, not in merchandising companies.
5. Depreciation on equipment a company uses in its selling and administrative activities would
be classified as a product cost.
6. The cost of goods manufactured is calculated by adding the amount of work in process at the
end of the year to the cost of raw materials used, direct labor worked, and manufacturing
overhead incurred for the year and then subtracting work in process at the beginning of the year.
7. A publisher that sells its books through agents who are paid a constant percentage
commission on each book sold would classify the commissions as a fixed cost.
8. The amount that a manufacturing company could earn by renting unused portions of its
warehouse is an example of an opportunity cost.
9. Variable costs per unit are affected by changes in activity.
10. Labor fringe benefits may be charged to direct labor or manufacturing overhead while
overtime premiums paid usually are considered a part of manufacturing overhead.
2. John Johnson decided to leave his former job where he earned P12 per hour to go to a new job
where he will earn P13 per hour. In the decision process, the former wage of P12 per hour would
be classified as a(n):
A) sunk cost. B) direct cost.
C) fixed cost. D) opportunity cost.
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8. Prime cost and conversion cost share what common element of total cost?
A) Direct materials. B) Direct labor.
C) Variable overhead. D) Fixed overhead.
10. The salary paid to the president of King Company would be classified on the income
statement as a(n):
A) administrative expense. B) direct labor cost.
C) manufacturing overhead cost. D) selling expense.
11. The cost of lubricants used to grease a production machine in a manufacturing company is
an example of a(n):
A) period cost. B) direct material cost.
C) indirect material cost. D) none of the above.
13. The costs of staffing and operating the accounting department at Central Hospital would be
considered by the Department of Surgery to be:
A) direct costs. B) indirect costs.
C) incremental costs. D) opportunity costs.
14. A cost incurred in the past that is not relevant to any current decision is classified as a(n):
A) period cost. B) opportunity cost.
C) sunk cost. D) differential cost.
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Essay
1. What is Managerial Accounting?
2. Explain each three pillars/goal of managerial accounting function?
3. Differentiate financial accounting from managerial accounting.
4. Explain the advantages and limitations of managerial accounting.
Multiple Choice:
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5. A professional accountant has a professional duty or right to disclose confidential information in each
of the following, except
a. To comply with technical standards and ethics requirements.
b. To disclose to BIR fraudulent scheme committed by the client on payment of income tax.
c. To comply with the quality review of a member body or professional body
d. To respond to an inquiry or investigation by a member body or regulatory body.
6. Wide-spread adherence to ethical standards in an advanced market economy tends to result in all of
the following except:
A) higher prices.
B) higher quality goods and services.
C) greater variety of goods and services available for sale.
D) safer products.
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I. Cost Terms: Identify each of the following statements with fixed costs or variable costs by writing
“fixed” or “variable” in the space provided.
______ a. A cost that varies in total with changes in the activity level.
______ b. A cost that varies on a per-unit basis with changes in the activity level.
______ c. A cost that remains fixed per unit with changes in the activity level.
______ d. A cost that remains fixed in total with changes in the activity level.
The company's product requires materials that cost P25 per unit. The company employs a
production supervisor whose salary is P2,000 per month. Production line workers are paid P15
per hour to manufacture and assemble the product. The company rents the equipment needed to
produce the product at a rental cost of P1,500 per month. Additional equipment will be needed
as production is expanded and the monthly rental charge for this equipment will be P900 per
month. The building is depreciated on the straight-line basis at P9,000 per year.
The company spends P40,000 per year to market the product. Shipping costs for each unit are
P20 per unit.
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The company plans to liquidate several investments in order to expand production. These
investments currently earn a return of P8,000 per year.
Required:
Complete the answer sheet above by placing an "X" under each heading that identifies the cost
involved. The "Xs" can be placed under more than one heading for a single cost, e.g., a cost
might be a sunk cost, an overhead cost, and a product cost. An "X" can thus be placed under
each of these headings opposite the cost.
The following data have been taken from the accounting records of JoGWAPO Corporation for
the just completed year. (All amount are in Philippine Peso)
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Required:
a. Prepare a Schedule of Cost of Goods Manufactured in good form.
b. Compute the Cost of Goods Sold.
c. Using data from your answers above as needed, prepare an Income Statement in good form
1. What are the difficulties that you encountered in studying the managerial accounting and cost
concepts?
2. How can you apply your learnings of managerial accounting and cost concepts in your
everyday life experiences (you may include your future plan)?
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Learn more about the managerial accounting and cost concepts in these Web sites:
1. https://accountinginfocus.com/managerial-accounting-2/introduction-managerial-
accounting-2/what-is-managerial-accounting/
2. https://www.yourarticlelibrary.com/cost-accounting/cost/study-notes-on-cost-concept-
and-classification-cost-accounting/74316
3. http://accounts.smccd.edu/nurre/online/chtr2.html
4. https://courses.lumenlearning.com/tcc-managacct/chapter/the-statement-of-cost-of-
goods-manufactured/
5. https://www.imanet.org/insights-and-trends/business-leadership-and-ethics/ima-
statement-of-ethical-professional-practice?ssopc=1
MANAGERIAL ACCOUNTING