MGM565 - Unit 3 Notes

INTERNATIONAL ACCOUNTING
TOOLS FOR FINANCIAL HEALTH

Unit 3 Notes
Gordon Gunn
gordon.gunn@royalroads.ca
MGMT 565
August – October 2022
START OF CLASS
Expectations
You have read Chapters 1-3 of the Managerial Accounting textbook
You have completed the practice questions from last class
You have contacted me with any concerns you have over last week’s material
You have checked Moodle to see any new forum posts.
You have posted to a forum.

You have checked Moodle to see what we will be talking about in class this
week
You are confident in moving forward with this week’s material
AGENDA
Introduction to managerial accounting

Admin/Unit Review
Shift from Financial to Managerial Accounting
Three-broad management functions

• Managerial Accounting/Ethics (Chapter 1)
• Cost Concepts & Behaviour Analysis (Chapter 2)
• Job-order cost accounting (Chapter 3)
For Next Unit
ADMIN/UNIT REVIEW
Unit 2 Review -
Questions
LEARNING OBJECTIVES
Chapter 1 Managerial Accounting
Explain distinguishing features of

managerial accounting
Identify three broad functions of

management and the role of managerial
accounting in supporting those functions
Explain the importance of business ethics

COMPARING MANAGERIAL
& FINANCIAL ACCOUNTING
Features Financial Accounting Managerial Accounting

Primary Users of Reports External users: shareholders, Internal users: officers and managers.
creditors, and regulators.
Types and Frequency of Financial statements. Internal reports.
Reports Quarterly and annually. As frequency as needed.
Purpose of Reports General-purpose. Special –purpose for specific decisions.
Content of Reports Pertains to business as a whole. Pertains to subunits of the business.

Highly aggregated (condensed). Very detailed.
Limited to double-entry accounting Extends beyond double-entry
and cost data. accounting to any relevant data.
Generally accepted accounting Standard is relevance to decisions.
principles.
Verification Process Audited by CPS (chartered No independent audits.
professional accountant).
Copyright John Wiley & Sons Canada, Ltd.

COMPARING MANAGERIAL &
FINANCIAL ACCOUNTING
Class Exercise
Together, complete E1.4 on page
1-21.
Financial and managerial accounting
information have distinguishing
characteristics. Indicate whether the
following characteristic more closely
represents F (financial) or M
(managerial) accounting
Class Exercise – E1.4
1. General purpose reports
2. Reports are used internally
3. Prepared in accordance with generally accepted accounting principles
4. Special purpose reports
5. Limited to historical cost data
6. Reporting standard is relevant to the decision to be made
7. Financial statements
8. Reports generally pertain to the business as a whole
9. Reports generally pertain to subunits
10. Reports issued quarterly or annually.
Class Exercise – E1.4
1. General purpose reports (F)
2. Reports are used internally (M)
3. Prepared in accordance with generally accepted accounting principles (F)
4. Special purpose reports (M)
5. Limited to historical cost data (F)
6. Reporting standard is relevant to the decision to be made (M)
7. Financial statements (F)
8. Reports generally pertain to the business as a whole (F)
9. Reports generally pertain to subunits (M)
10. Reports issued quarterly or annually (F)
MANAGEMENT
ACCOUNTING
The focus of managerial accounting is often on the company’s

directive; found in the vision and mission statements vs. standards of
financial accounting.
A focus on tools versus statements
Using the right tools for the job vs. to produce correct financial
statements
Management Accounting:
• Is personalised to ensure internal users needs are met
• Leverages tools such as budgets, forecasts, costing methods, performance measures
etc..
INTRODUCTION TO
MANAGERIAL ACCOUNTING
Class Exercise
Exercise E1.9, page 1-23.
Identify various managerial accounting practices. 1. Activity-based costing 2. Just-in-
time inventory 3. Balanced scorecard 4. Value chain. Match each of the terms with
the statement below that best describes the term.
a. ______A performance-measurement technique that attempts to consider and
evaluate all aspects of performance using financial and nonfinancial measures in
an integrated fashion
b. ______The group of activities associated with providing a product or service
c. ______An approach used to reduce the cost associated with handling and holding
inventory by reducing the amount of inventory on hand
d. ______A method used to allocate overhead to products based on each product's
use of the activities that cause the incurrence of the overhead cost
INTRODUCTION TO
Class Exercise - Solution
Match the following to the definitions of
tools:
1. Activity-Based Costing (D)
2. Just-in-Time Inventory (C)
3. Balanced Scorecard (A)
4. Value Chain (B)
INTRODUCTION TO
Value Chain
All activities associated with providing a product or service
Whole costs would include costs from all activities within the value chain
For manufacturing, a value chain would look like this:

INTRODUCTION TO
Porter’s Value Chain
Source: TOPgradeMBA.com
INTRODUCTION TO
Value Chain
The purpose of a value chain is to help organize

expenses into categories to determine where value
is added and non-value added activities exist.
In doing this, it allows a company to focus its cost

cutting efforts in areas which should not impact the
perceived value to a customer.
MANAGEMENT FUNCTIONS
Planning
Decision-Making
Controlling Directing
Copyright © 2009 John Wiley & Sons Canada, Ltd.

INTRODUCTION TO
Class Exercise
Identify which statement best describes each of the three management
functions: Planning, Directing or Controlling.
Identify which of the following statements best describes each of the above
functions:
a. ______ requires management to look ahead and to establish objectives. A key
objective of management is to add value to the business.
b. ______ involves coordinating a company's diverse activities and human
resources to produce a smoothly running operation. This function relates to the
implementation of planned objectives.
c. ______ is the process of keeping the activities on track. Management must
determine whether goals are being met and what changes are necessary when
there are deviations.
INTRODUCTION TO
Identify which statement best describes
each of the three management functions:
1. Planning (A)
2. Directing (B)
3. Controlling (C)
INTRODUCTION TO
Identify which statement best describes
each of the three management functions:
1. Planning (A)
2. Directing (B)
3. Controlling (C)
INTRODUCTION TO
Planning
Requires management to look ahead and to establish objectives.
A key objective is to add value to the business.
Includes:
• Budgeting
• Forecasting
Defines what success looks like for the company.
SO 2/3
INTRODUCTION TO
Directing
Involves coordinating a company’s diverse activities and human
resources to produce smoothly running operations.
Relates to the implementation of planned activities.
Includes:
• Process optimization
• Hiring practices
• Ethical oversight
Provides guidance in how to achieve success.

SO 2/3
INTRODUCTION TO
Controlling
Is the process of keeping activities on track.
Management must determine whether goals are being met and what changes
are necessary when there are deviations.
Includes:
• Developing performance measurement system

• Analyzing variances
• Ensures mistakes and sub-optimal performance are changed or prevented
Identifies the adjustments necessary to reach objectives.
SO 2/3
ETHICS
Are you an ethical person?

What is an ethic?
What does it mean to act ethically?
What is a business ethic?
What are some examples of business ethics?
How can we learn to be ethical?

BUSINESS ETHICS
Class Discussion
What is an ethical failure?
Why are business ethics important?
SO 2/3
BUSINESS ETHICS
Good Ethics – Good Business

Business scandals cause massive investment losses and
employee layoffs
Corporate fraud is increasing
Employee fraud makes up 60% of all fraud
Intentional misstatement of financial statements is most

costly
SO 2/3
BUSINESS ETHICS
Good Ethics – Good Business
Creating proper incentives

• Monitoring and evaluating employees may produce
incentives to act unethically, for example, overly
ambitious budgets
• Employees may feel that they succeed no matter what
• Ineffective and unrealistic controls may result in
declining quality of product
• Good ethics add value to a company’s image
SO 2/3
BUSINESS ETHICS
Corporate Social Responsibility

Considers not only profitability but also the company's efforts
to employ sustainable business practices regarding its
employees and the environment
Often referred to as the triple bottom line
• People
• Planet
• Profits
SO 2/3
LEARNING OBJECTIVES
Chapter 2 Managerial Cost Concepts and

Cost Behaviour Analysis
Define the three classes of manufacturing costs
and differentiate between product and period
costs.
Explain variable, fixed and mixed costs and the

relevant range.
Apply the high-low method to determine the

components of mixed costs.
Demonstrate how to calculate costs of goods

manufactured and prepare financial statements for
a manufacturer.
MANAGERIAL COST
CONCEPTS
Class Discussion
What do we mean by cost?
Why is cost management important?
What is a cost object?

MANUFACTURING COST
CONCEPTS
Product versus Period Costs
Product costs
• Direct Material + Direct Labour + Manufacturing OH
• Necessary and integral to product
• Recorded as inventory when incurred
• Expensed when sold
Period costs
• Matched with revenue in a specific time period
• Expensed when incurred

MANUFACTURING COST
CONCEPTS
Manufacturing Costs
Manufacturing involves conversion of raw materials into finished
goods
Merchandising involves selling goods in the form they are purchased

MANUFACTURING COST
CONCEPTS
Direct Costs
Raw materials and or direct labour that can be easily associated
with and easily traced to the finished product are called direct
costs
Direct costs are relevant enough for decision making that it is

economically feasible to directly TRACE them to the product.
MANUFACTURING COST
CONCEPTS
Manufacturing Overhead
Other Indirect
indirect materials
Indirect
labour
MANUFACTURING COST
CONCEPTS
Work of factory workers that have no physical association
with the finished product, or for which it is impractical to
trace to the goods produced, is indirect labour
Examples include:
• Wages of maintenance workers,

janitors, & security guards
• Supervisors
• Time-Keepers
MANUFACTURING COST
CONCEPTS
Class Exercise
Together, complete Exercise D2.15,
page 2-36. Classify each cost as a
period cost or a product cost. Within
the product cost category, indicate if
the cost is part of direct materials
(DM), direct labour (DL) or
manufacturing overhead (MO).
MANUFACTURING COST
CONCEPTS
Class Exercise – D2.15
Cost Period or Product Cost DM/DL/MO
Advertising
Blank CDs
Depreciation of CD image burner
Salary of factory manager
Factory supplies used
Paper inserts for CD cases
CD Plastic Cases
Salaries of sales reps
Salaries of factory maintenance
Salaries of employees who burn CDs
MANUFACTURING COST
CONCEPTS
Class Exercise – Solution
Cost Period or Product Cost DM/DL/MO
Advertising Period
Blank CDs Product DM
Depreciation of CD image burner Product MO
Salary of factory manager Product MO
Factory supplies used Product MO
Paper inserts for CD cases Product DM
CD Plastic Cases Product DM
Salaries of sales reps Period
Salaries of factory maintenance workers Product MO
Salaries of employees who burn CDs Product DL
MANUFACTURING COST
CONCEPTS
Accounting for Period and Product Costs
Product costs
• Recorded as an asset (inventory) when incurred
• Expensed when finished goods inventory is sold
MANUFACTURING COST
CONCEPTS
Inventory systems
Beginning Cost of Goods

Inventory Purchased
Cost of Goods
If sold Available for If not sold
Sale
Cost of Goods Ending Inventory

Sold (Income (Statement of
Statement) Financial Position
MANUFACTURING COST
CONCEPTS
Manufacturing cost system
Cost flow parallels the physical flow of the materials as they are converted into
finished goods.

MANUFACTURING COST
CONCEPTS
Period costs
Selling costs and general and administrative costs
are period costs.
• Non-manufacturing costs
• Matched with a specific period of time
• Charged to expense as incurred
• Charged against revenues in the period

MANUFACTURING COST
CONCEPTS
Product versus Period Costs

Break
COST BEHAVIOUR
ANALYSIS
Exercise
Together, complete P2.42A on page 2-
44, using the Unit 3 Excel Workbook.
COST BEHAVIOUR
ANALYSIS
Class Discussion
What do we mean by cost behaviour?
Why is an understanding of cost

behaviour important?
COST BEHAVIOUR
ANALYSIS
Relevant Range
Throughout the range of possible levels of activity, a straight-line
relationship usually does not exist for either variable costs or fixed
costs
The relationship between variable costs and changes in activity level is
often curvilinear
For fixed costs, the relationship is nonlinear – some fixed costs will not
change over the entire range of activities, others may change at
different levels of activity
The Relevant Range is the range of activity over which a company
expects to operate during a year.

COST BEHAVIOUR
ANALYSIS Illustration 2.8
Nonlinear behaviour of
variable and fixed costs
Relevant Range

COST BEHAVIOUR
ANALYSIS
Relevant Range
Illustration 2.9
Linear behaviour within
relevant range
Within the
relevant range
of one year, a
straight-line
relationship
usually exists for
both variable
and fixed costs.

COST BEHAVIOUR
ANALYSIS
Variable Costs
Illustration 2.6
Nonlinear behaviour of
variable and fixed costs

COST BEHAVIOUR
ANALYSIS
Fixed Costs

COST BEHAVIOUR
ANALYSIS
Mixed Costs
Costs that have both a

variable cost element and a
fixed cost element
Change in total but not

proportionately with changes
in activity level

COST BEHAVIOUR
ANALYSIS
Individual Exercise
Individually, complete exercise E2.24 on
page 2-38.
COST BEHAVIOUR
ANALYSIS
Individual Exercise - Solution
COST BEHAVIOUR
ANALYSIS
Individual Exercise
Individually, complete exercise E2.27 on
page 2-39.
Classify costs as variable, fixed or mixed.

If variable or mixed, what is the activity
base for each?
COST BEHAVIOUR
ANALYSIS
V/F/M Activity Base
1. Wood used in the production of furniture.
2. Fuel used in delivery trucks.
3. Straight-line depreciation on factory
building.
4. Screws used in the production of
furniture.
5. Sales staff salaries.
6. Sales commissions.
7. Property taxes.
8. Insurance on buildings.
9. Hourly wages of furniture craftspeople.
10. Salaries of factory supervisors.
11. Utilities expense.
12. Telephone bill.
COST BEHAVIOUR
ANALYSIS
V/F/M Activity Base
1. Wood used in the production of Variable. Board feet of wood
furniture.
2. Fuel used in delivery trucks. Variable. Gallons
3. Straight-line depreciation on factory Fixed.
building.
4. Screws used in the production of Variable. # of screws used
furniture.
5. Sales staff salaries. Fixed.
6. Sales commissions. Variable. $ of sales
7. Property taxes. Fixed.
8. Insurance on buildings. Fixed.
9. Hourly wages of furniture craftspeople. Variable. Hours
10. Salaries of factory supervisors. Fixed.
11. Utilities expense. Mixed. Hours of operation
12. Telephone bill. Mixed. Number of calls
COST BEHAVIOUR
ANALYSIS
How to analyze costs
Measure key
Correlate changes
business activities,
in cost with changes
using relevant
in activity level
business metrics
• Sales (retail)
• Miles driven
(transportation)
• Room occupancy (hotel)
• Students (education)

COST BEHAVIOUR
ANALYSIS
How to analyze costs
The activity level selected is called the activity (or
volume) index
• Identifies the activity that causes changes in the behaviour of
costs
• Allows costs to be classified according to their response to
changes in activity as:
• Variable Cost
• Fixed Cost
• Mixed Cost

COST BEHAVIOUR
ANALYSIS
Mixed Costs – High-Low Method
Mixed costs must be classified into their fixed and variable
elements
One approach to separate the costs is called the high-low
method
• Uses the total costs incurred at both the high and the
low levels of activity to classify mixed costs
• The difference in costs between the high and low levels
represents variable costs, since only variable costs
change as activity levels change
COST BEHAVIOUR
ANALYSIS
Mixed Costs – High–Low Method
Change in Change in Variable

Total Activity Cost per
Costs Level Unit

COST BEHAVIOUR
ANALYSIS
Exercise – High-Low Method
In Breakouts, complete Exercise E2.25
on page 2-39, sections (b), (c) and (d)
only.
COST BEHAVIOUR
ANALYSIS
Exercise – High-Low Method Solution
(b) The relevant range is 4,000 – 9,000 units of output since a
straight-line relationship exists for both direct materials and rent within
this range.
(c) Variable cost per unit within the relevant range:
(4,000 – 9,000 units)
= Change in Cost/ Change in Units
= $10,000/*5,000* = $2 per unit
*Any costs and units within the relevant range could have been used to
calculate the same unit cost of $2.
(d) Fixed cost within the relevant range (4,000 to 9,000 units) =
$7,000.
LEARNING OBJECTIVES
Chapter 3 Job-Order Cost Accounting
Explain the characteristics and purposes of cost

accounting.
Describe the flow of costs in a job-order cost
accounting system.
Use a job cost sheet to assign costs to work in
progress.
Demonstrate how to determine and use the
predetermined overhead rate.
Prepare entries for manufacturing and service jobs
completed and sold.
Distinguish between under- and over-applied
manufacturing overhead.
JOB-ORDER COST
ACCOUNTING
Cost Accounting Systems
Cost accounting involves:

• Measuring;
• Recording; and
• Reporting of product costs
Two basic cost accounting systems:

• Job-order cost system
• Process cost system

JOB ORDER COST
ACCOUNTING
Job Order Cost System
Costs are assigned to each job or batch
A job may be for a specific order or inventory
A key feature: Each job or batch has its own distinguishing

characteristics
The objective: to calculate the cost per job
Measures costs for each job completed not for set time periods

JOB ORDER COST
ACCOUNTING
Job Order Cost System
Illustration 3.1
Job-order cost system
JOB ORDER COST
ACCOUNTING
Job-Order Cost Flows

JOB ORDER COST
ACCOUNTING
Two-step process:
• Accumulate the manufacturing costs incurred
• Raw materials
• Factory labour
• Manufacturing overhead
• Assign the accumulated costs to the work done.

JOB ORDER COST
ACCOUNTING
Direct Costs
• Direct costs make their way into work-in-process directly (we know how
much of each cost goes into the product because it’s straightforward and
economically feasible to measure
• Examples:
• 2kg of material per unit of product
• .5 hours of direct labour per unit of product

JOB ORDER COST
ACCOUNTING
In-direct Costs – Manufacturing Overhead
• Indirect materials do not physically become part of the finished
product or represent too small a part of the finished product in terms
of cost
• Since it’s not economically feasible to trace these items to the finished
product we make an estimate and allocate them instead
• This is done using an overhead rate or rates

JOB ORDER COST
ACCOUNTING
Relates to production operations as a whole
Cannot be assigned to specific jobs based on actual costs incurred
Must be assigned to work in process and to specific jobs on an

estimated basis through the use of a Predetermined Overhead Rate
• Based on the relationship between estimated annual overhead costs and
expected annual operating activity
• Expressed in terms of an activity base such as
• Direct labour costs, direct labour hours, machine hours, or any other
activity that is an equitable base for applying overhead costs to jobs
JOB ORDER COST
ACCOUNTING
Predetermined overhead rate:
• Established at the beginning of the year
• May use a single, company-wide predetermined rate
• May use a different rate for each department and each
department may have a different activity base
• The formula for a predetermined overhead rate is:
Estimated Annual Expected Annual Predetermined

÷ =
Overhead Costs Operating Activity Overhead Rate

JOB ORDER COST
ACCOUNTING

JOB ORDER COST
ACCOUNTING
Exercise – Predetermined Overhead Rate
Individually, complete Exercise BE 3.7
on page 3-33, using the Unit 3 Excel
Workbook, and review with class.

JOB ORDER COST
ACCOUNTING
Work in Process
(All Jobs)
is
Actual Activity Predetermined Assigned
X
Based Used Overhead rate to
Job 1 Job 2 Job 3

JOB ORDER COST
ACCOUNTING
Under/Overapplied Manufacturing Overhead
A debit balance in manufacturing overhead means

that overhead is underapplied.
• Overhead assigned to work in process is less than overhead
incurred.
A credit balance in manufacturing overhead means

that overhead is overapplied.
• Overhead assigned to work in process is greater than overhead
incurred

JOB ORDER COST
ACCOUNTING
Exercise – Overhead Application
Individually, complete Exercise E3.21 on
page 3-36, using the Unit 3 Excel
Workbook, and review with class.

JOB ORDER COST
ACCOUNTING
Process Cost System
Used when a large volume of similar products are manufactured

• Cereal
• Automobiles
• Compact Discs
• Paint
Cost are accumulated for a specific time period (a week or a month)
Costs are assigned to departments or processes for a set period of time

JOB ORDER COST
ACCOUNTING
Process Cost System

Product Costs
1. Measuring
2. Recording
3. Reporting
Cost Accounting
Job Order Process

Cost System Cost System
1. Each job has its own 1. Homogeneous products
distinguishing continuously produced.
characteristics. 2. Accumulates product
2. Measures and costs by department for a
accumulates costs for period of time.
each job. 3. Unit cost calculated by
3. Unit cost calculated dividing total process costs
by dividing total job during the period by units
costs by units produced during the
produced. period.
Total Cost
Unit Cost
Copyright © John Wiley & Sons Canada, Ltd.

NEXT UNIT
Practice Questions
Chapter 6
Business P 2-51B on page 2-48
Pre-readings Managerial
Stories P 3-41B on page 3-45
Accounting
P 3-45B on page 3-47

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INTERNATIONAL ACCOUNTING

TOOLS FOR FINANCIAL HEALTH

You have completed the practice questions from last class

You have checked Moodle to see any new forum posts.

You have posted to a forum.

Introduction to managerial accounting

Shift from Financial to Managerial Accounting

Three-broad management functions

Chapter 1 Managerial Accounting

Explain distinguishing features of

Identify three broad functions of

Explain the importance of business ethics

Features Financial Accounting Managerial Accounting

Content of Reports Pertains to business as a whole. Pertains to subunits of the business.

Copyright John Wiley & Sons Canada, Ltd.

The focus of managerial accounting is often on the company’s

A focus on tools versus statements

All activities associated with providing a product or service

For manufacturing, a value chain would look like this:

The purpose of a value chain is to help organize

In doing this, it allows a company to focus its cost

Copyright © 2009 John Wiley & Sons Canada, Ltd.

Requires management to look ahead and to establish objectives.

A key objective is to add value to the business.

Defines what success looks like for the company.

Relates to the implementation of planned activities.

Provides guidance in how to achieve success.

• Developing performance measurement system

Identifies the adjustments necessary to reach objectives.

Are you an ethical person?

What does it mean to act ethically?

What is a business ethic?

What are some examples of business ethics?

How can we learn to be ethical?

Why are business ethics important?

Good Ethics – Good Business

Corporate fraud is increasing

Employee fraud makes up 60% of all fraud

Intentional misstatement of financial statements is most

Good Ethics – Good Business

Creating proper incentives

Corporate Social Responsibility

Often referred to as the triple bottom line

Chapter 2 Managerial Cost Concepts and

Explain variable, fixed and mixed costs and the

Apply the high-low method to determine the

Demonstrate how to calculate costs of goods

Why is cost management important?

What is a cost object?

Copyright John Wiley & Sons Canada, Ltd.

Merchandising involves selling goods in the form they are purchased

Copyright John Wiley & Sons Canada, Ltd.

Direct costs are relevant enough for decision making that it is

• Wages of maintenance workers,

Beginning Cost of Goods

Cost of Goods Ending Inventory

Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd.

Why is an understanding of cost

Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd.