MANAC – PRELIMS
CHAPTER 15: MANAGERIAL ACCOUNTING MANAGERIAL ACCOUNTING IN THE ORGANIZATION
MANAGERIAL VS. FINANCIAL ACCOUNTING
Accounting information is often divided into two types:
1. FINANCIAL ACCOUNTING
- information is reported at fixed intervals
(monthly, quarterly, yearly) in general-purpose
financial statements.
- Financial Statements are prepared according to
generally accepted accounting principles (GAAP)
o Statement of Cash Flows
o Balance Sheet
o Retained Earnings Statement
o Income Statement
- statements are used by external users
o Shareholders
o Creditors
o Government agencies
o General public
2. MANAGERIAL ACCOUNTING
- information is designed to meet the specific
needs of a company’s management.
➢ Historical data - objective measures of past
operations
➢ Estimated data - subjective estimates about
future decisions
- Management uses both types of information in
o Directing daily operations
o Planning future operations
o Developing business strategies
- Managerial Accounting Reports
o Production Analysis
o Activity Analysis
o Budget Report
- Unlike the financial statements prepared in
financial accounting, managerial accounting
reports do not always have to be
➢ Prepared according to generally accepted
accounting principles (GAAP)
o Only the company’s management uses
the information.
o GAAP are not relevant to the specific
decision making needs of management
➢ Prepared at fixed intervals (monthly, quarterly,
yearly).
o most reports are prepared as
management needs the information
➢ Prepared for the business as a whole.
o prepared for products, projects, sales
territories, or other segments of the
company
REVIEWER BY: RENEA NAOMI APOSTOL
- departments or similar organizational units are
assigned responsibilities for specific functions or
activities
- operating structure of a company can be shown in
an organization chart
- departments in a company can be viewed as
having
➢ Line responsibilities - line department
o directly involved in providing goods or
services to the customers of the company
➢ Staff responsibilities - staff department
o provides services, assistance, and advice
to the departments with line or other
staff responsibilities.
o no direct authority over a line
department
• CONTROLLER - chief management accountant
- controller’s staff consists of a variety of other
accountants who are responsible for specialized
accounting functions
o Systems and procedures
o General accounting
o Budgets and budget analysis
o Special reports and analysis
o Taxes
o Cost accounting
THE MANAGEMENT PROCESS
- has five basic phases, which interact with one
another
1. PLANNING
- developing the company’s objectives (goals) and
translating these objectives into courses of action
➢ STRATEGIC PLANNING
o long-term actions (strategies) to achieve
the company’s objectives
o periods of 5 to 10 years
➢ OPERATIONAL PLANNING
o short-term actions for managing the day-
to-day operations of the company
2. DIRECTING
- process by which managers run day-to-day
operations
MANAC – PRELIMS
3. CONTROLLING
- Monitoring operating results and comparing
actual results with the expected
- feedback allows management to isolate areas for
further investigation and possible remedial action
➢ MANAGEMENT BY EXCEPTION
o philosophy of controlling by comparing
actual and expected results
4. IMPROVING
➢ CONTINUOUS PROCESS IMPROVEMENT
- philosophy of continually improving employees,
business processes, and products
- eliminate the source of problems in a process
- right products (or services) are delivered in the
right quantities at the right time
5. DECISION MAKING
- Inherent in each of the preceding management
processes
- In managing a company, management must
continually decide among alternative actions
USES OF MANAGERIAL ACCOUNTING INFORMATION
➢ MANAGERIAL ACCOUNTING
- provides information and reports for managers to
use in operating the business
- provides the cost of manufacturing a product,
which can be used to determine its selling price
- allows for comparing the costs of manufacturing
products over time and can be used to monitor
and control the cost of direct materials, direct
labor, and factory overhead.
➢ PERFORMANCE REPORTS
- allow management to identify any large amounts
of scrap materials or employee downtime.
- analyze the potential efficiencies and dollar
savings of purchasing computerized equipment to
speed up the production process.
- analyze how many units need to be sold to cover
operating costs and expenses. could be used to
set monthly selling targets and bonuses for sales
personnel.
MANUFACTURING OPERATIONS
- operations of a business can be classified as
service, merchandising, or manufacturing
- Most of the managerial accounting concepts that
apply to manufacturing businesses also apply to
service and merchandising businesses
DIRECT AND INDIRECT COSTS
• COST
- payment of cash or the commitment to pay cash
in the future for the purpose of generating
revenues
- in managerial accounting, costs are often
classified according to the decision-making needs
of management
REVIEWER BY: RENEA NAOMI APOSTOL
❖ COST OBJECT
- relationship to a segment of operations
- product, a sales territory, a department, or an
activity (research and development)
- costs identified with cost objects are either
➢ DIRECT COSTS
- identified with and can be traced to a cost object
o EX: cost of wood used to make guitars is a
direct cost
➢ INDIRECT COSTS
- Can’t be identified with or traced to a cost object
o EX: salaries of production supervisors are
indirect costs of producing a guitar;
salaries can’t be traced to individual
guitar
MANUFACTURING COSTS
- cost of a manufactured product includes
o cost of materials used in making the
product
o cost of converting the materials into a
finished product
- cost of a finished product:
➢ DIRECT MATERIALS COST
- Manufactured products begin with raw materials
that are converted into finished products
➢ DIRECT LABOR COST
- employees to convert materials into finished
products
- cost of employee wages that is an integral part of
the finished product
➢ FACTORY OVERHEAD COST (manufacturing
overhead / factory burden)
- Costs other than direct materials cost and direct
labor that are incurred in the manufacturing
process
- factory overhead costs are indirect costs
o heating and lighting the factory
o repairing and maintaining factory
equipment
o property taxes on factory buildings & land
o insurance on factory buildings
o factory plant & equipment depreciation
- materials and labor costs that do not enter
directly into the finished product
o cost of oil used to lubricate machinery
o wages: janitorial; supervisory employees
- insignificant costs of direct materials or direct
labor of the total product cost
PRIME COSTS AND CONVERSION COSTS
- Direct materials, direct labor, and factory
overhead costs may be grouped together for
analysis and reporting
➢ PRIME COSTS
o direct materials and direct labor costs
➢ CONVERSION COSTS
o direct labor and factory overhead costs
MANAC – PRELIMS
o costs of converting the materials into a
finished product
- Direct labor - both prime cost and conversion cost
PRODUCT COSTS AND PERIOD COSTS
- for financial reporting purposes
➢ PRODUCT COSTS - manufacturing costs: direct
materials, direct labor, and factory overhead
- As product costs are incurred, they are recorded
and reported on the balance sheet as inventory.
- When the inventory is sold, the cost of the
manufactured product sold is reported as cost of
goods sold on the income statement.
➢ PERIOD COSTS - selling and administrative costs.
- reported as expenses on the income statement in
the period in which they are incurred.
- they never appear on the balance sheet.
o SELLING EXPENSES - incurred in
marketing the product and delivering the
product to the customer.
o ADMINISTRATIVE EXPENSES - incurred in
managing the company and are not
directly related to the manufacturing or
selling functions.
SUSTAINABILITY
- practice of operating a business to maximize
profits while attempting to preserve the
environment, economy, and needs of future
generations
SUSTAINABILITY PRACTICES
- acknowledge that a company’s long-term success
requires continued availability of natural
resources and a productive social environment.
SUSTAINABLE BUSINESS ACTIVITIES
AGRICULTURE
- Farming and ranching techniques that do not
damage or disrupt the environment
- Mixed farming, crop rotation, multiple cropping
ENERGY
- Generating energy with little or no pollution
- Wind turbines, solar power
ENGINEERING AND CONSTRUCTION
- Designing and constructing buildings that are
highly efficient in using natural resources, while
minimizing pollution
- Recycled building materials, high-efficiency
heating and cooling systems, renewable energy
generation
REVIEWER BY: RENEA NAOMI APOSTOL
TRANSPORTATION
- Using transportation methods that result in little
pollution and have a minimal impact on the
environment
- Expanded public transportation systems, green
vehicles, biofuel-powered vehicles
WASTE MINIMIZATION
- Recycling and reuse practices that reduce the
amount of waste disposed in landfills
- Curbside recycling collection, composting,
reusable products (e.g. water bottles)
ECO-EFFICIENCY MEASURES IN MANAGERIAL
ACCOUNTING
- Sustainability information can provide important
feedback to guide a company’s strategic and
operational decision making.
- Managers can use this information to
o increase revenue
o control costs
o allocate resources efficiently.
• ECO-EFFICIENCY MEASURES
- managerial accounting information that helps
managers evaluate the savings generated by using
fewer natural resources in a company’s
operations.
❖ ENERGY EFFICIENCY - replacing lighting fixtures in
a production facility with energy-efficient lighting
❖ MATERIAL USE EFFICIENCY - reducing the amount
of product packaging materials
❖ FUEL EFFICIENCY - replacing gas-powered vehicles
with hybrid or alternative energy-source vehicles
❖ WASTE EFFICIENCY - recycling and reusing waste
and by-product materials
• SUSTAINABILITY ACCOUNTING STANDARDS
BOARD (SASB)
- organized in 2011
- develop accounting standards that help
companies report decision-useful sustainability
information to external financial statement users.
FINANCIAL STATEMENTS FOR A MANUFACTURING
BUSINESS
- retained earnings and cash flow statements for a
manufacturing business are similar to service and
merchandising businesses
- balance sheet and income statement for a
manufacturing business are more complex
- manufacturer makes the products that it sells
and, thus, must record and report product costs.
- merchandising business reports only Merchandise
Inventory on its balance sheet
- manufacturing business reports three types of
inventory on its balance sheet
➢ MATERIALS INVENTORY (RAW MATERIALS
INVENTORY)
- costs of the direct and indirect materials that
have not yet entered the manufacturing process.
MANAC – PRELIMS REVIEWER BY: RENEA NAOMI APOSTOL
➢ WORK IN PROCESS INVENTORY
- direct materials, direct labor, and factory
overhead costs for products that have entered the
manufacturing process, but are not yet completed
(in process)
➢ FINISHED GOODS INVENTORY
- completed (or finished) products that have not
been sold.

INCOME STATEMENT FOR A MANUFACTURING BUSINESS

1. Determine the cost of materials used.
- income statements for merchandising and
2. Determine the total manufacturing costs incurred.
manufacturing businesses differ primarily in the
3. Determine the cost of goods manufactured
reporting of the cost of merchandise (goods)
available for sale and sold during the period
FLOW OF MANUFACTURING COSTS

MERCHANDISING BUSINESS EXERCISES CHAPTER 15

- purchases merchandise ready for resale to
customers.

➢ MERCHANDISE AVAILABLE FOR SALE

Beginning Merchandise
+ Net Purchases
Inventory

➢ COST OF MERCHANDISE SOLD

Cost of Merchandise Ending Merchandise
-
Available for Sale Inventory

MANUFACTURING BUSINESS
- makes the products it sells, using direct materials,
direct labor, and factory overhead
- cost of
- goods manufactured is the total cost of making
products that are available for sale during the
period
- Cost of goods manufactured is required to
determine the cost of goods sold to prepare the
income statement
- cost of goods manufactured is often determined
by preparing a statement of cost of goods
manufactured The following information is available for January for MLB:
Mitti Company, a baseball glove manufacturer
➢ COST OF FINISHED GOODS AVAILABLE FOR SALE
Cost of Goods Cost Of direct materials used in production 25,000
Beginning Finished Direct labor 35,000
+ Manufactured During
Goods Inventory
the Period Factory overhead 20,000
Work in process inventory, January 1 130,000
➢ COST OF GOODS SOLD Work in process inventory, January 31 25,000
Cost of Finished Goods Ending Finished Goods Finished goods inventory, January 1 115,000
-
Available for Sale Inventory Finished goods inventory, January 31 112,000)

For January, determine (A) the cost of goods

manufactured and (B) the cost of goods sold
MANAC – PRELIMS
CHAPTER 19: COST-VOLUME-PROFIT ANALYSIS
COST BEHAVIOR
- manner in which a cost changes as a related
activity changes
- Understanding the behavior of a cost depends on
• Identifying the activities that cause the cost to
change
o activity bases/activity drivers
• Specifying the range of activity over which the
changes in the cost are of interest
o relevant range
- Costs are normally classified as variable costs,
fixed costs, or mixed costs
➢ VARIABLE COSTS
- vary in proportion to changes in the activity base
- activity base is units produced, direct materials
and direct labor costs
- Cost per unit remains the same regardless of
changes in the activity base
- Total cost changes in proportion to changes in the
activity base
➢ FIXED COSTS
- remain the same in total dollar amount as the
activity base changes
- activity base is units produced, many factory
overhead costs such as straight-line depreciation
- Cost per unit decreases as the activity level
increases and increases as the activity level
decreases
- Total cost remains the same regardless of changes
in the activity base
➢ MIXED COSTS (SEMI VARIABLE/SEMIFIXED
COSTS)
- have characteristics of both a variable and a fixed
cost
• high-low method - cost estimation method that
may be used to separate mixed costs into their
fixed and variable components
- estimated by subtracting the total variable costs
from the total costs for the units produced
❖ FIXED COST
(Variable Cost per Unit x Units
Total Cost -
Produced)
REVIEWER BY: RENEA NAOMI APOSTOL
✓ VARIABLE COSTING (DIRECT COSTING)
- One method of reporting variable and fixed costs
- only the variable manufacturing costs (direct
materials, direct labor, and variable factory
overhead) are included in the product cost
- fixed factory overhead is treated as an expense of
the period in which it is incurred
VARIABLE AND FIXED COST BEHAVIOR
VARIABLE, FIXED, AND MIXED COST
COST-VOLUME-PROFIT RELATIONSHIPS
COST-VOLUME-PROFIT ANALYSIS
- examination of the relationships among selling
prices, sales and production volume, costs,
expenses, and profits.
- Analyzing the effects of changes in
o selling prices on profits
o costs on profits
o volume on profits
- Setting selling prices
- Selecting the mix of products to sell
- Choosing among marketing strategies
CONTRIBUTION MARGIN
- excess of sales over variable costs
Contribution Margin = Sales – Variable Costs
- covers fixed costs
- Once the fixed costs are covered, any additional
contribution margin increases income from
operations
CONTRIBUTION MARGIN RATIO (PROFIT-VOLUME RATIO)
- percentage of each sales dollar available to cover
fixed costs and to provide income from operations
Contribution Margin
Contribution Margin Ratio =
Sales
- most useful when the increase or decrease in
sales volume is measured in sales dollars
- change in sales dollars multiplied by the
contribution margin ratio equals the change in
income from operations
❖ CHANGE IN INCOME FROM OPERATIONS:
Contribution Margin
Change in Sales Dollars x
Ratio
MANAC – PRELIMS REVIEWER BY: RENEA NAOMI APOSTOL
UNIT CONTRIBUTION MARGIN TARGET PROFIT
- useful for analyzing the profit potential of - sales required to earn a target or desired amount
proposed decisions of profit
Sales Price per Unit - Variable Cost per Unit Fixed Cost + Target Profit
Sales (Units) =
- most useful when the increase or decrease in Unit Contribution Margin
sales volume is measured in sales units
(quantities) COST-VOLUME-PROFIT (BREAK-EVEN) CHART
- change in sales volume (units) multiplied by the - graphically shows sales, costs, and the related
unit contribution margin equals the change in profit or loss for various levels of units sold
income from operations 1. Volume in units of sales is indicated along the
❖ CHANGE IN INCOME FROM OPERATIONS horizontal axis. The range of volume shown is the
Change in Sales Unit x Unit Contribution Margin relevant range in which the company expects to
operate. Dollar amounts of total sales and total
BREAK-EVEN POINT costs are indicated along the vertical axis.
- level of operations at which a company’s 2. A total sales line is plotted by connecting the
revenues and expenses are equal point at zero on the left corner of the graph to a
- company reports neither income nor a loss from second point on the chart. The second point is
operations determined by multiplying the maximum number
of units in the relevant range, which is found on
the far right of the horizontal axis, by the unit
sales price. A line is then drawn through both of
these points. This is the total sales line.
❖ BREAK-EVEN POINT IN SALES UNITS 3. A total cost line is plotted by beginning with total
Break-Even Sales ______Fixed Cost______ fixed costs on the vertical axis. A second point is
=
(Units) Unit Contribution Margin determined by multiplying the maximum number
of units in the relevant range, which is found on
❖ BREAK-EVEN POINT IN SALES DOLLARS the far right of the horizontal axis by the unit
Break-Even Sales ______Fixed Cost______ variable costs and adding the total fixed costs. A
=
(Dollars) Contribution Margin Ratio line is then drawn through both of these points.
This is the total cost line.
❖ CONTRIBUTION MARGIN RATIO
4. The break-even point is the intersection point of
Contribution Margin Unit Contribution Margin the total sales and total cost lines. A vertical
=
Ratio Unit Selling Price
dotted line drawn downward at the intersection
point indicates the units of sales at the break-
even point. A horizontal dotted line drawn to the
EFFECT OF CHANGES IN FIXED COSTS
left at the intersection point indicates the sales
FIXED COSTS
dollars and costs at the break-even point.
- do not change in total with changes in the level of
activity
PROFIT-VOLUME CHART
- may change because of advertising campaigns,
- plots only the difference between total sales and
changes in property tax rates, or changes in
total costs (or profits)
factory supervisors’ salaries
- allows managers to determine the operating
•  Fixed Costs =  Break-Even
profit (or loss) for various levels of units sold
•  Fixed Costs =  Break-Even
1. Volume in units of sales is indicated along the
horizontal axis. The range of volume shown is the
EFFECT OF CHANGES IN UNIT VARIABLE COSTS
relevant range in which the company expects to
UNIT VARIABLE COSTS
operate. Dollar amounts indicating operating
- do not change with changes in the level of activity
profits and losses are shown along the vertical
- may be affected by changes in the cost per unit of
axis.
direct materials, changes in the wage rate for
2. A point representing the maximum operating loss
direct labor, or changes in the sales commission
is plotted on the vertical axis at the left. This loss
paid to salespeople
is equal to the total fixed costs at the zero level of
•  Unit Variable Costs =  Break-Even sales.
•  Unit Variable Costs =  Break-Even 3. A point representing the maximum operating
profit within the relevant range is plotted on the
EFFECT OF CHANGES IN UNIT SELLING PRICE right.
•  Unit Selling Price =  Break-Even 4. A diagonal profit line is drawn connecting the
•  Unit Selling Price =  Break-Even maximum operating loss point with the maximum
operating profit point.
MANAC – PRELIMS REVIEWER BY: RENEA NAOMI APOSTOL
5. The profit line intersects the horizontal zero EFFECT OF OPERATING LEVERAGE ON INCOME FROM
operating profit line at the break-even point in OPERATIONS
units of sales. The area indicating an operating
profit is identified to the right of the intersection,
and the area indicating an operating loss is
identified to the left of the intersection

ASSUMPTIONS OF COST-VOLUME-PROFIT ANALYSIS MARGIN OF SAFETY

- Cost-volume-profit analysis depends on several - indicates the possible decrease in sales that may
assumptions occur before an operating loss results
• Total sales and total costs can be represented by - if the margin of safety is low, even a small decline
straight lines. in sales revenue may result in an operating loss
• Within the relevant range of operating activity, - margin of safety may be expressed in the
the efficiency of operations does not change. following ways
• Costs can be divided into fixed and variable ❖ DOLLARS OF SALES
components. Margin of Safety = Sales - Sales at Break-Even Point
• The sales mix is constant.
❖ UNITS OF SALES
• There is no change in the inventory quantities
during the period Sales - Sales at Break-Even Point
Margin of Safety =
Unite Selling Price
SALES MIX CONSIDERATIONS
❖ PERCENT OF CURRENT SALES
- Many companies sell more than one product at
Sales - Sales at Break-Even Point
different selling prices Margin of Safety =
Sales
- products normally have different unit variable
costs and, thus, different unit contribution
EXERCISES CHAPTER 19
margins.
- break-even analysis can still be performed by
considering the sales mix
• SALES MIX - relative distribution of sales among
the products sold by a company
- useful to think of the individual products as
components of one overall enterprise product
- unit selling price of the overall enterprise product
equals the sum of the unit selling prices of each
product multiplied by its sales mix percentage
- unit variable cost and unit contribution margin of
the overall enterprise product equal the sum of
the unit variable costs and unit contribution
margins of each product multiplied by its sales
mix percentage

OPERATING LEVERAGE
- measurement of relationship between a
company’s contribution margin and income from
operations 1. If sales are $500,000, variable costs are $200,000,
__Contribution Margin__ and fixed costs are $240,000, what is the
Operating Leverage = contribution margin ratio?
Income from Operations
- difference between contribution margin and a. 40% b. 48% c. 52% d. 60%
income from operations is fixed costs
- companies with high fixed costs will normally 2. If the unit selling price is $16, the unit variable
have high operating leverage cost is $12, and fixed costs are $160,000, What is
- used to measure the impact of changes in sales the break-even sales (units)?
on income from operations a. 5,714 units c. 13,333 units
- Using operating leverage, the effect of changes in b. 10,000 units d. 40,000 units
sales on income from operations follows
❖ PERCENT CHANGE IN INCOME FROM 3. Based on the data presented in Question 2, how
OPERATIONS many units of sales would be required to realize
Percent Change in Sales x Operating Leverage income from operations of $20,000?
a. 11,250 units c. 40,000 units
b. 5,000 units d. 45,000 units