​ ​MANAGERIAL ACCOUNTING

COURSE DESCRIPTION
This course includes the study of Management strategies ( Management Accounting 1
and 2) and its relationship with cost accounting, financial accounting of the firm.
Management accounting selects and provides information to all levels of management
needed in planning, evaluating, and controlling operations.
LEARNING OUTCOMES
At the end of the topic, the students should be able to:
● Describe the role, historical perspective, and direction of Management
Accounting.
● Know the foundations of Management accounting
● Understand, analyze, and interpret financial statements
● Know cost terms, concepts, and cost behavior
● Learn design of cost, and Management Accounting System
● Know Management Accounting concepts and techniques for planning and
control
● Know Management Accounting concepts and techniques for decision making

TOPIC OUTLINE
l- 1. COURSE ORIENTATION
Role, Historical Perspective, and Direction of Management Accounting
● Definition of Management Accounting and Financial Accounting
● Distinguish between Management Accounting and Financial Accounting
● Objectives of Management Accounting
● Responsibilities of Management Accountants
● Standard Ethical Conduct
● Controller ship and its basic function
● Controller’s function and Treasurer’s function
● Evolving Management tools and techniques
● ​Supply chain analysis
● MRP vs. just in time production system

2. Understanding and Analysis, and Interpretation of​ ​Financial Statements

● Purpose of Financial Statements
● Major users of Financial Statements
● Profitability, Liquidity, and Solvency
 ​ ​MANAGERIAL ACCOUNTING

● Limitation of ratio analysis

● Importance of ratio between debt and equity
● Meaning of Trading on equity or Leverage
● Horizontal and Vertical analysis
● Summary of commonly used financial ratios
3. Cost terms and concepts
● Three major elements of product cost
● Direct materials and Indirect Materials
● Direct Labor and Indirect Labor
● Manufacturing Overhead
● Product cost and period cost
● Income Statement of Manufacturing Company
● Direct labor and indirect labor
● Cost object and driver
4. Cost Behavior
● Variable Cost and Fixed cost
● Differential, opportunity, and sunk Cost
● Basic cost classification
II- System Design: Job Order Costing
1) Distinguish Job Order costing from Process Costing
● Actual Costing and normal costing
● Stages in recording transaction in a Manufacturing company
2. System Design: Process Costing
● Condition when Process System is used
● Five steps in Process costing system
● Calculation of equivalent units
3. Weighted average costing method
● FIFO method of process costing
● Standard costing method
● System Design: Activity Based costing
4. Simple Costing and activity Based costing
● How will ABC be used
● Variable Costing and absorption costing
● Differentiate Variable costing from Absorption Costing
● Format of Income Statement to be used.
 ​ ​MANAGERIAL ACCOUNTING

III- Management Accounting Concepts and Techniques for Planning and control
● Cost Volume Profit Relationship
● Business Planning
● Responsibility Accounting
● Transfer Pricing
● Balance Scorecard
Iv- Management Accounting Concepts and Techniques for Decision making
● Quantitative techniques
● Accounting Information in decision making,
● Cost and Benefits
● Capital budgeting decisions
 ​ ​MANAGERIAL ACCOUNTING

PRELIMINARY TERM
WEEK # 1
1. COURSE ORIENTATION

Role, Historical Perspective , and Direction of Management Accounting

Management Accounting ​is the process of identification, measurement, accumulation,
analysis, preparation, interpretation, and communication of information that assists
executives in fulfilling organizational objectives. ​(Siddiqui, 2015)
Financial Accounting involves record keeping of business transactions governed by
generally accepted accounting principles, leading to the preparation of financial
statements for the use of internal as well as external decision makers.
Distinguish between management Accounting and financial Accounting.

Areas of Comparison Management Accounting Financial Accounting

1. Primary users of Organization managers at Outside users such as

information various levels creditors, investors, the
government as well as
organization managers.

2. Types of accounting Not restricted to a Double entry system

system double-entry system,any
useful system.

3. Restrictive Guidelines No guides or restriction; Adherence to GAAP is

only criterion is usefulness required

4. Units of Measurement Any Useful Monetary or Historical Peso

physical measurement such
as labor hour or machine
hour or pesos.

5. Focal Point of Analysis Various Segments Of Business entity as a whole

business entities.
 ​ ​MANAGERIAL ACCOUNTING

6. Frequency Of Reporting Whenever needed, may not periodically on a regular

be on a regular basis. basis.

7. Degree of Reliability Heavily subjective for Demands objectivity;

planning purposes, but historical in nature
objective data are used
when relevant; futuristic in
nature.

What are the objectives of Management Accounting?

1. To select and provide information in all levels of management needed in:
1. planning, evaluating, and controlling operation.
2. safeguarding organization assets
3. communicating with interested parties outside the organization such as
shareholders and regulatory bodies.
2. To participate in the management process making strategic, tactical, and operating
decisions and helping to coordinate the efforts of the entire organization.

https://www.dominionsystems.com/blog/6-reasons-why-management-accounting-is-important-for-decisi
on-making

Reasons Why Management Accounting Is Important for Decision Making ​(Mclean,

2018)​:
1. Relevant costs analysis
2. Audience targeting
3. Make or buy evaluations
4. Define Budgets
5. Controlling
6. Planning
 ​ ​MANAGERIAL ACCOUNTING

A management accounting department is one of the company’s essential units, but

most entrepreneurs don’t realize it due to its “under the radar” style of work.
Management accountants are insiders who create internal analyses to guide the overall
business strategy.
By definition, their job is to prepare internal financial reports, records and accounts to
aid managers’ ​decision-making process in achieving short and long-term business goals.
In other words, their job is to simplify complex financial data and turn them into
actionable insights.
The definition itself is pretty much self-explanatory, but there is a lot more hiding
behind this field of work. Our post will show you six reasons that make management
accounting so important in decision-making. Let’s take a look!

Payroll So Flexible, You’ll Think it Was Built for Your Business​ ​(Mclean, 2018)

1. Relevant Costs Analysis

The most important job of the management accountant is to conduct a relevant cost
analysis to determine the existing expenses and give suggestions for the future
activities. One question stands out here: How should I spend my budget?
Before a company takes any action, it needs to explore all possibilities and ​figure out the
best tactic to increase the profit​. This means management accountants ought to analyze
different sales channels, products, services, and marketing activities in order to find the
most profitable business model.
Once the management accounting team is done with relevant cost analysis, you can
make better and evidence-based decisions.

2. Audience Targeting
Marketers must pay special attention to their consumers. They represent an anchor of
the business, so each company has to create a buyer persona with all of the
corresponding features such as:
● Age and gender
● Location
● Income level
● Academic background
● Lifestyle
● Personal values
 ​ ​MANAGERIAL ACCOUNTING

But even if you define the average customer, there is still some work to do.
According to specialists at the ​accounting help online​, management accountants should
analyze the value of every customer group to detect the most lucrative units: “With this
special type of audience targeting, you can invest additional time and resources in
markets that can bring you more profit in the long-term perspective.”

3. Make or Buy Evaluations

Product production is often the most expensive segment of the business, so it’s crucial
to be sure which option suits the needs of your company. Generally, there are two
solutions – make products on your own or buy them from the third-party provider. In
this case, management accountants are those who should cut the knot and tell you
what to do.
They can evaluate the real cost of each solution and determine whether it’s more
appropriate to produce items internally or buy them from the manufacturer. This may
seem like a simple decision, but it’s extremely sensitive and has the power to make or
break your business.

4. Define Budgets
Nothing is random when it comes to budgeting. On the contrary, budget-related
decisions must comply with your sales history and marketing database. This is where
management accountants step in to analyze former activities and define investments for
the future actions. They create financial plans for each department, project, marketing
campaign, new product, or any other undertaking.

5. Controlling
Controlling is another important aspect of management accounting. Namely, it
evaluates the work of all company units and makes conclusions related to the financial
performance. That way, you get to learn the reasons for both the loss and the profit
generated by your departments. In such circumstances, it is much easier for senior
executives to reduce operational costs.
For instance, they can cut salaries in under performing departments or reduce the
number of employees. On the other hand, they can also invest in branches that prove to
be highly profitable, thus increasing the total profitability of the business.

6. Planning
The last benefit of management accounting comes from its potential to detect financial
patterns and predict future developments. It enables you to stay up to date with the
latest industry trends, which means you can react in a timely manner and implement
strategies that allow you to stay head and shoulders above competitors.
 ​ ​MANAGERIAL ACCOUNTING

With the planning power of management accounting, you can also create long-term
business policies. Doing so, you make sure that the whole team stays on the same track
and works uniformly towards achieving your business objectives.

Concluding Thoughts
Data precision and accuracy are critical to the success of each company. Without
meaningful and actionable insights, you can hardly evaluate the current state of affairs
or plan the future business moves. In such circumstances, management accounting
becomes an anchor of modern business.
This article showed you six reasons that make management accounting very important
in decision-making. Did you already use the services of management accountants? Did it
help you improve internal planning? Don’t hesitate to let us know in comments – we will
be glad to see your opinion about this topic!
Source:
https://www.dominionsystems.com/blog/6-reasons-why-management-accounting-is-important-for-decisi
on-making

Responsibilities of Management Accountants

1. Reporting – Providing reports to management as well as shareholders, creditors and
government agencies.
2. Interpretations – Interpreting and providing internal as well as external information
pertinent to the various segments of the organization.
3. Resource Management – establishing system which facilitate planning and control of
the firm’s resources(e.g.tax planning, and compliance,etc)
4. Information system development -design and developing overall management
information system.
5. Technological Implementation​- familiarization with modern equipment and
techniques appropriate to controlling and using information. Examples are computer
application, net work, and communications systems.
6. Verification ​– Application of internal audit procedure to assure the accuracy and
reliability of information derived from Accounting systems and related sources.
7. Administration- develop and maintain effective and efficient Management
accounting organization.
 ​ ​MANAGERIAL ACCOUNTING

Standard Ethical Conduct for Management Accountants:

1. Competence- ​management accountants have the responsibility to:
● Maintain an appropriate level of professional competence by ongoing
development of their knowledge and skills
● Perform their professional duties in accordance with relevant laws, regulations,
and technical standards.
● Prepare complete and clear reports and recommendations after appropriate
analyses relevant and reliable information.
2. Confidentiality- ​Management accountants have the responsibility to:
● Refrain from disclosing confidential information acquired in the course of their
work, except when authorized, unless legally obligated to do so.
● Inform subordinates as appropriate regarding the confidentiality of information
acquired in the course of their work and monitor their activities to assure the
maintenance of their confidentiality.
● Refrain from using or appearing to use confidential information acquired in the
course of their work for unethical or illegal advantage either personally or
through third parties.
3. Integrity- ​Management accountants have the responsibility to:
● Avoid actual or apparent conflict of interest and advise all appropriate parties
of any potential conflict.
● Refrain from engaging in any activity that would prejudice their ability to carry
out their duties ethically.
● Refuse any gift, favor or hospitality that would influence or appear to influence
their actions.
4. Objectivity- ​management accountants have responsibility to:
● Communicate information fairly and objectively.
● Disclose fully all relevant information that could reasonably be expected to
influence an intended user’s understanding of the reports, comments and
recommendation presented.

Controllership ​is the practice of establishing science which 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.
Basic Functions of Controllership
1. Planning- ​Establish and maintain an integrated plan of operation consistent with the
company’s goals and objectives.
 ​ ​MANAGERIAL ACCOUNTING

2. Control- ​Develop and revise standards against which to measure performance and
provide guidance and assistance.
3. Reporting- ​Prepare, analyze, and interpret financial results for the utilization by the
management in the decision making process.
4. Accounting- ​Design, establish, and maintain general and cost accounting systems at
all company levels.
5. Other primary responsibilities- ​Manage and supervise such functions as taxes
including interface with the respective taxing authorities and agents.
Comparison of Controller’s function and Treasurer’s functions:
Controllership Treasurership
1. Planning for control 1. Provision of Capital
2. Financial Reporting and 2. Investor relation interpretation
3. Management audit 3. Banking and custody of funds
4. Internal audit 4. Credit and Collection
5. Tax administration 5. Short term Financing
6. Government reporting 6. Investments
7. Economic appraisal 7. Insurance
Evolving Management tools and Techniques
1. Total Quality Management (TQM) 6. Activity Based Costing
2. Just in time/Backflush costing 7. Life cycle costing
3. Process Re-engineering 8. Target costing and
4. Flexible manufacturing system and 9. New Performance Measure
automation
5. Theory of constraints (TOC)
Explain the following:
1. Supply chain – ​describes the flow of goods, service, and information from initial
sources of materials and services to the delivery of products to consumers regardless of
whether those activities occur in the same organization or in other organizations.
 ​ ​MANAGERIAL ACCOUNTING

2. MRP ( Materials requirement Planning)- ​system uses a ‘push through” approach that
manufactures finished goods for inventory on the basis of demand forecasts.
3. JIT ( Just in time)- ​production system uses a “ demand pull “ approach in which goods
are manufactured only to satisfy customer orders.

WEEK # 2
Foundation of Management Accounting Understanding and Analysis, and
Interpretation of Financial Statements

PURPOSE OF FINANCIAL STATEMENTS

The objectives of financial statement analysis is to determine the extent of a firm’s
success, in attaining its financial goals, namely:
● To earn a maximum profit.
● to maintain solvency.
● To attain stability.

THREE MAJOR USERS GROUP OF FINANCIAL STATEMENT

1. Creditors- ​lend money to a company on either a short or a long term basis. Short
term creditors include trade creditors and lending institutions. Long term creditors
include lending institutions and corporate bondholders.
2. Equity Investors- ​equity investors are those who purchase an ownership interest in a
company.
3. Management- ​monitoring the company’s overall performance.

DISTINGUISH PROFITABILITY, LIQUIDITY, AND SOLVENCY

Profitability – ​is the case with which the company generates income.
Liquidity – ​is the case with which an item, such as an asset can be converted to cash.
Solvency- ​is an ability of a company to meet its obligation created by long term debt.
 ​ ​MANAGERIAL ACCOUNTING

Limitations of Ratio analysis:

1. The greatest single limitation of ratio analysis is the people tend to place too much
reliance on the ratios. Information gathered from ratio analysis is only part of what is
needed to make good decisions.
2. Attempting to predict the future using past results is problematic at best.
3. The financial statements used as the basis of the ratios are based on historical cost.
4. Figures from the balance sheet used in the calculation of the ratios are year end
numbers.
5. Comparing ratios of the company in one industry with those of the company in
another industry is difficult because industry peculiarities will cause the ratios to differ.
6. There are no hard and fast rules telling the analyst what numbers to use to calculate
the ratios.

Distinguish between Horizontal and Vertical Analysis ​(Scribd, 2018)

1. Horizontal analysis – ​is the comparison of the same information for two or three
years to determine the amount of change or percentage increase or decrease.
2. Vertical Analysis –​ is the comparison of one item to others in the same group for a
given year.

What is Trading on Equity? ​(Scribd, 2018)

Trading on equity also known as financial leverage is a phrase used to describe the
situation whereby the cost of borrowed funds is less than the rate earned on the funds.

Summary of commonly used Financial Ratios

1. Ratios used to evaluate short term financial position
2. Ratios used to evaluate Asset Liquidity and management Efficiency.
3. Ratios used to evaluate long term Financial Position
or Stability/Leverage.
4. Ratios used to me to measure Profitability and return to investors.

Formula and Significance
I. Ratios Used to evaluate short-term financial position(short-term solvency and
liquidity)
NAME
1. Current Ratio
2. Acid-test ratio or quick
ratio
3. a) Working Capital to
total assets
3. b) Working Capital
4. Cash Flow Liquidity ratio
5. Defensive Interval Ratio
​ ​MANAGERIAL ACCOUNTING
FORMULA SIGNIFICANCE
Total current Assets/Total Primary test of solvency to
Current Liabilities meet current obligations
from current assets as a
going concern; measure of
adequacy of working capital
Total Quick Assets/Total A more severe test of
Current Liabilities immediate solvency;
test of liability to meet
demands from current
assets.
Working Capital/total assets Indicates relative liquidity of
total assets and distribution
of resources employed.
Current assets ​less ​Current
liabilities
Cash + Marketable Measures short-term
Securities + Cash Flow from liquidity by considering as
operating activities/Current cash resources (numerator)
Liabilities cash plus cash equivalents
plus cash flow from
operating activities.
Quick Assets/Projected Measures length of time in
Daily Operational Expenses days the firm can operate
less ​Non-cash Charges on its present liquid
resources.
 ​ ​MANAGERIAL ACCOUNTING

ll. Ratios used to evaluate assets liquidity and management efficiency

NAME FORMULA SIGNIFICANCE

1. a) Trade Receivable Net Credit sales / Average Velocity of collection of

Turnover trade receivable (net) trade accounts and notes;
test of efficiency of
collection.

b) Average collection 360 days / receivable Evaluates the liquidity of

period or number of days’ turnover or Accounts accounts receivable and the
sales uncollected Receivable / (net sales / firm’s credit policies.
360)

2. Inventory Turnover Measures efficiency of the

firm in managing and selling
a) Merchandise Turnover Cost of goods sold /
inventories.
Average Merchandise
Inventory

b) Finished goods inventory Cost of goods sold / ​do

Average finished goods
inventory

c) Goods in process Cost of goods manufactured Measures efficiency of the

turnover / Average goods-in process firm in managing and selling
inventory inventories.

d) Raw Materials Turnover Raw Materials used / Number of times raw

Average Raw Materials materials inventory was
inventory used and replenished
during the period.

e)Days supply in inventory 360 days / inventory Measures average number

turnover of days to sell or consume
the average inventory.

3. Working capital turnover Net sales / Average Working Indicates adequacy and
capital activity of working capital.
 ​ ​MANAGERIAL ACCOUNTING

4. Percent of each current Amount of each current Indicates relative

asset to total current assets asset item / total current investment in each current
asset asset.

5. Current assets turnover Measures movement and

utilization of current
Cost of sales + operating
resources to meet operating
expenses + income taxes +
requirements.
other expenses (net)
(excluding depreciation and
amortization) / average
current assets

6. Payable Turnover Net purchases / Average Measure efficiency of the

accounts Payable company in meeting trade
payable

7. Operating cycle Average conversion period Measures the length of time

of inventories + Average required to convert cash to
Collection period of finished goods; then to
receivable + days cash receivable and then back to
cash.

8. Days Cash Ave. Cash Balance / (cash Measures availability of

operating costs / 360 days) cash to meet average daily
cash requirement

9. Free cash flow Net Cash From operating Excess of operating cash
activities- cash used for flow over basic needs
investing activities and
dividends

10. Investment or assets Net sales / Ave. total Measures efficiency of the
turnover investment or Ave. total firm in managing all assets
assets

11. Sales to fixed assets Net sales / Ave. Fixed assets Tests Roughly the efficiency
(plant assets turnover) (net) of management in keeping
plant properties employed.

12. Capital Intensity Total Assets / net sales Measures efficiency of the
firm to generate sales
through employment of its
resources.
 ​ ​MANAGERIAL ACCOUNTING

III. Ratios used to evaluate long-term financial position or stability

NAME FORMULA SIGNIFICANCE

1. Debt Ratio Total liabilities / total assets Shows proportion of all
assets that are financed
with debt
2. Equity Ratio Total Equity / total assets Indicates proportion of
assets provided by owners.
Reflects financial strength
and caution to creditors.
3. Debt to equity ratio Total liabilities / total equity Measures debt relative to
amounts of resources
provided by owners

4. Fixed Assets to long term Fixed Assets (net)/total long Reflects extent of
liabilities term liabilities investment in long term
assets
5. Fixed Assets to total Fixed Assets (net)/Total Measures the proportion of
Equity Equity owner’s capital invested in
Fixed assets

6. Fixed Assets to total Fixed Assets (net)/total Measures investment in

Equity Equity long term capital assets

7. Book value per share of Ordinary stockholders’ Measures recoverable

ordinary shares
8. Times interest earned
equity/ no. of outstanding amount in the event of
ordinary shares liquidation if assets are
realized at their book value.
Net income before interest Measures how many times
and taxes/Annual interest interest expense is covered
charged. by operating profit

9. Times preference Net Income after Indicates ability to provide

dividends requirement tax/Preference dividends dividends for preference
earned requirement shareholders

10. Times fixed charges Net income before taxes Measures coverage
earned and fixed charges/ fixed capability more broadly
than times interest earned
 ​ ​MANAGERIAL ACCOUNTING

charges (rent+int.+sinking by including other fixed

fund payment before taxes charges.

IV Ratios used to measure profitability and returns to investors

NAME FORMULA SIGNIFICANCE

1.Gross Profit Margin Gross Profit/Net Sales Measures profit generated

after consideration of cost of
product sold.

2. Operating profit Margin Operating Profit/Net Sales Measures profit generated

after consideration of
operating cost

3. Net Profit margin(rate of Net Profit/Net Sales Measures profit generated

return on net sales) after consideration of all
expenses and revenues

4. Cash Flow Margin Cash flow for operating Measures ability of the firm to
activities/Net Sales translate sales to cash.

5. Rate of return on assets Net profit/Ave. Total assets Measures overall efficiency of
(ROA) the firm in managing assets
and generating profits.

6. Rate of return on equity Net income/ average Measures rate of return on

Ordinary Equity resources provided by the
owner.

7. Earnings per share Net Income less preference Peso returns on Ordinary
dividends requirement/Ave. shares. Indicative of ability to
Ordinary shares outstanding pay dividends

8. Price earnings ratio Market value per share of Measures relationship

ordinary shares/Earnings between price of ordinary
per share of ordinary shares shares in the open market and
profit earned on a per share
basis.
 ​ ​MANAGERIAL ACCOUNTING

9. Dividend payout Dividends per Shows percentage of earnings

share/Earnings per share paid to shareholders.

10. Dividend yield Annual dividends per Shows the rate earned by
share/Market value per shareholders from dividends
share of ordinary shares relative to current price of
shares

11. Dividends per share Dividends paid or Shows portion of income

declared/Ordinary shares distributed to shareholders on
outstanding a per share basis.

12. Rate of return on Net Income/Ave. Current Measures the profitability of

average current assets assets current assets invested.

13. Rate of return per Rate of return per . of Shows profitability of each
turnover of current assets current assets/Current turnover of current assets
Assets turnover

Source: https://quizlet.com/220557836/management-accounting-chapter-5-flash-cards/

WEEK #3
COST TERMS AND CONCEPTS
Three Major Elements of Product cost in Manufacturing company:
Direct Materials, Direct labor, Manufacturing Overhead
1. Direct Materials – are an integral part of a finished product and can be conveniently
traced into it.
2. Indirect Materials – ​are generally small items of material such as glue and nails.
Indirect materials are ordinarily classified as Manufacturing overhead.
3. Direct Labor – ​includes those labor costs that can be easily traced to particular
products. Direct labor is also called “ touch labor”.
4. Indirect labor – i​ ncludes the labor costs of janitor, supervision, materials handlers,
and other factory workers that cannot be conveniently traced directly to particular
products.
5. Manufacturing overhead – ​includes all manufacturing costs except direct materials
and direct labor.
Difference between product cost and period cost
 ​ ​MANAGERIAL ACCOUNTING

Product Cost ​is any cost involved in the purchase or the

manufacture of goods. In the case of manufactured goods those costs consist o f direct
materials, direct labor and manufacturing overhead.
Period Cost ​is a cost that is taken directly to the income statement as an expense in the
period in which it is incurred.
Source: https://studylib.net/doc/8904405/chapter-2-solutions

Describe how the income statement of Manufacturing company differs from the
income statement of a merchandising company.
The income statement of a manufacturing firm differs from the income of
merchandising firms in the cost of goods sold section.
Illustration of Income Statement - Powerpoint Presentation

The ​merchandising firm sells finished goods that it has purchased from suppliers. These
goods are listed as purchases in the cost of goods sold section.
Since the ​Manufacturing ​firm ​produces its goods rather than buying them from a
supplier. It lists a “Cost of goods Manufactured” element in place of “ Purchases.” It
identifies its inventory in the section as “finished goods inventory” rather than
“Merchandise Inventory.”

Distinguish Cost Objects from Drivers

Cost Objects – any item for which costs are measured and assigned including such
things as products, plants and projects, departments and activities.
Drivers – ​are factors that cause changes in resource usage, cost, or revenues. Resource
drivers measure the demand placed on resources by activities and are used to assign
the cost of resources to activities.
 ​ ​MANAGERIAL ACCOUNTING

WEEK # 4
COST BEHAVIOR
Cost behavior ​refers to how cost will react or respond to changes in the level of
business activity. ​(Brewer et al., 2010)

Variable Cost vs. Fixed Cost

Variable Cost – ​is a cost that varies in total, in direct proportion to changes in the level
of activity. A variable cost is constant per unit of product. ​(Brewer et al., 2010)
Fixed cost – ​is fixed in total, but will vary inversely on a per unit basis with changes in a
level of activity.

How do fixed costs create difficulties in costing units of a project?

​ When fixed costs are involved, the cost of the unit product will depend on the number
of units being manufactured. As production increases, the cost per unit will fall as the
fixed is spread over more units.
Definition of differential cost, opportunity Cost, and sunk cost.
Differential cost – ​is a cost that differs between alternatives in a decision. ​(Brewer et al.,
2010)
Opportunity Cost – ​is the potential benefit that is given up when one alternative is
selected over the other. ​(Brewer et al., 2010)
Sunk Cost – ​is a cost that has already been incurred and cannot be altered by any
decision taken now or in the future. ​(Brewer et al., 2010)

Basic Cost Classification

a. According to Management function
1. Manufacturing Cost
 ​ ​MANAGERIAL ACCOUNTING

2. Marketing Cost
3. Administrative Cost
b. According to time period
​ 1. Historical cost
2. Future Cost

c. According to generally accepted accounting treatment

​ 1. Product cost
2. Period Cost
d. According to traceability to cost objective
​ 1. direct cost
2. Indirect Cost
e. According to behavior
1. Variable Cost
2. Fixed cost
3. Mixed cost
f. According Managerial Influence
1. Controllable Cost
2. Non controllable Cost
g. According yo significance in Decision Making
1. Relevant Cost
2. Irrelevant cost
h. According to commitment to cost expenditure.
​1, Discretionary cost
2. Committed cost
What is the importance of analyzing cost behavior?
The major objective of Cost analysis is to provide internal management with proper
and necessary information so that intelligent decisions can be made regarding planning,
coordinating and controlling operations.
 ​ ​MANAGERIAL ACCOUNTING

What effect that increase in volume have on :

(a) unit fixed cost
(b) Unit variable cost
(c) Total fixed cost
(d) Total variable cost.
Answer:
(a) Unit fixed cost will decrease as volume increases
(b) Unit variable cost will remain constant as volume increases.
(c) Total fixed cost will remain constant as volume increases.

(d) total variable cost will increase as the volume

increases.
Classify the following fixed cost as normally being either
committed or discretionary;
1. Depreciation on building -------------------
2. Advertising -------------------
3. Research -- -----------------
4. Long term equipment leases --------------------
5. Pension payment to the firm’s retirees --------------------
6. Management development and training --------------------
 ​ ​MANAGERIAL ACCOUNTING

REFERENCE

BOOKS

Cabrera, G. A., & Cabrera, M. E. (2017). ​Management accounting: Concepts and

applications.​ GIC Enterprises & Company,.

Cabrera, M. E. (2007). ​Management advisory services​. GIC Enterprises.

Cabrera, M. E., & Cabrera, G. A. (2019). ​Financial management ( comprehensive volume)

(2019th–2020th ed.). GIC Enterprises & Company, Incorporated.

ONLINE SOURCES

Brewer, P., Garrison, R., & Noreen, E. (2010). ​Managerial accounting​ (13th ed.). Mcgraw

Hill.

https://www.academia.edu/37165620/Managerial_Accounting_13th_edition_by_Ray_

H_Garrison

McGraw-Hill Ryerson. (2012). ​Solutions manual​ (p. 1). McGraw-Hill Ryerson Ltd.

https://studylib.net/doc/8904405/chapter-2-solutions

Mclean, J. (2018, September 24). ​6 reasons why management accounting is important

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 ​ ​MANAGERIAL ACCOUNTING

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