Cost & Managerial Accounting Study Material

STUDY GUIDELINES MATERIAL FOR EXIT EXAM
THEMATIC AREA: COST AND MANAGERIALACCOUNTING
COURSES: COST AND MANAGEMENT ACCOUNTING I & II
Compiled By Yoseph Tadesse (MSc)
Feb 2023
1-1 AcFn 3031 By Yoseph T Monday, March 27, 2023
PART I: COST AND MANAGEMENT ACCOUNTING -I
Course Contents
1.Overview of Cost and Management Accounting
2.The costing of inputs resources(Product costs)
2.1 Materials
2.2 labors
2.3 Overheads
3.The costing ofoutputs resources(Costing methods)
3.1 Job-Order Costing
3.2 Process Costing
4.Cost Allocations Methods
5.Activity-Based Costing and Management
5.1 Activity-Based Costing(ABC)
5.2.Activity-Based Management(ABM)
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Part I: Learning Objectives
 Under this particular section you should be able to;
Differentiate among Cost Accounting, Managerial Accounting & Financial

Accounting along with their objectives.
Identify cost classifications and their behaviors.
Describe the uses of linear, curvilinear and step functions, and
Explain the concepts of cost units, cost centers and profit centers.
State the ethical considerations in Management Accounting.
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AcFn 3031 By Yoseph T Monday, March 27, 2023
1.1 Overview of Cost And Management Accounting
1.1.1. Cost Accounting, Managerial Accounting & Financial Accounting
 Accounting systems process the economic events and transactions data
into information that is helpful to managers and other users.
 These relevant information is disseminate for users the uses of managerial
accounting and financial accounting.
 Managerial accounting measures and reports financial and nonfinancial
information that helps managers make decisions to fulfill the goals of an
organization, whereas;
 Financial accounting measures and reports financial information to
external parties based on generally accepted accounting principles and
standards.
 Cost accounting provides information for management accounting and
financial accounting relating to the costs of acquiring or using resources.
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 Cost accounting takes the perspective that collecting cost information is a
function of the management decisions being made and the distinction
between management accounting and cost accounting is not so clear cut.
 The major function of cost accounting is cost accumulation for inventory

valuation and income determination.
 Management accounting, however, emphasizes the use of the cost data

for planning, control, and decision-making purposes.
 We use cost management to describe the approaches and activities of

managers in short-run and long-run planning and control decisions that
increase value for customers and lower costs of products and
services.(see their differences on the text book).
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 The design of a management accounting system should be guided by four
themes common to many companies challenges phases:
1. The customer focus theme is particularly critical.
2. value chain and supply chain analysis,
3. key success factors, and
4. Continuous improvement and benchmarking and all are these are geared
to improve customer satisfaction.
 There are 3 key management accounting guidelines;
1. Cost-Benefit Approach
2. Behavioral and Technical considerations and
3. Different Costs for Different Purposes
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1.1.2. Cost Classifications and Their Behaviors
 Costs are sacrificed resources to achieve a specific objective that are
expected to bring a current or future benefit to the organization.
 A single cost can be classified and used in several ways, depending on the
purpose of the analysis.
 Fig 1.1 below, provides an overview of commonly used cost classifications
and these classifications enable managers to do the following:
 Control costs by determining which are traceable to a particular cost object,
 Calculate the number of units that must be sold to achieve a certain level of
profit (cost behavior).
 Identify the costs of activities that do and do not add value to a product or
service.
 Classify costs for the preparation of financial statements.
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 Cost Traceability
 Costs that can be directly traced to a cost object is known as direct costs
and cost that are cannot be conveniently traced to a cost object is known
as indirect costs.
 Cost object - anything of interest for which a cost is desired/incured.
 Direct Costs Examples
 Parts
 Assembly line wages
 Indirect Costs Examples
 Electricity
 Rent
 Property taxes
 Depreciation of plant and equipment and etc.
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 Cost Traceability
 How does a cost system determine the costs of various cost objects?
 Typically in two basic stages: accumulation, followed by assignment.
 Cost accumulation is the collection of cost data in some organized way by
means of an accounting system.
 Cost assignment is a general term that encompasses both
1) tracing direct costs to a cost object and
2) allocating indirect costs to a cost object.
 The term cost tracing is used to describe the assignment of direct costs to
a particular cost object.
 The term cost allocation is used to describe the assignment of indirect
costs to a particular cost object.
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 Cost Behavior
 Cost behavior refers to how costs react to a change in the level of activity.
 Variable Costs- changes in total in proportion to changes in the related
level of activity or volume.
 Fixed Costs-remain unchanged in total regardless of changes in the
related level of activity or volume.
 Variable costs are constant on a per-unit basis. Inversely fixed costs per
unit reduced as more and more units are produced.
 Costs can be a fixed or variable only with respect to a specific activity or a
given time period.
 This specific activity or period of time is referred to as relevant range.
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 Value-Adding Versus Non value-Adding Costs
 A value-adding cost is the cost of an activity that increases the market

value of a product or service.
 i.e. the costs of value chain in manufacturing company
 Anon value-adding cost is the cost of an activity that adds cost to a product
or service but does not increase its market value.
 i.e. the costs of administrative activities that do not add value to the
products or services produced directly.
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 For decision making purposes
 A given cost can be treated as relevant or irrelevant, avoidable or

unavoidable, actual or standard or budgeted, opportunity or sunk,
committed or discretionary, incurred or locked in, joint or separable costs
for different decision making purposes.
 For financial reporting purpose
 For financial reporting purpose costs can be a Product (inventoriable)

costs- costs assigned to inventory; include direct materials, direct labor,
and overheads.
 Period costs -costs of resources used during the accounting period that are
not assigned to products.
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 For decision making purposes
 A given cost can be treated as relevant or irrelevant, avoidable or

unavoidable, standard or budgeted, opportunity or sunk, committed or
discretionary, incurred or locked in, joint or separable costs for different
decision making purposes.
 For financial reporting purpose costs can be a Product (inventoriable)

costs- costs assigned to inventory; include direct materials, direct labor,
and overheads.
 Period costs -costs of resources used during the accounting period that are
not assigned to products. i.e. selling and administrative expenses.
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 Product costs appear on the income statement as cost of goods sold and
on the balance sheet as inventory whereas period costs appear as
operating expenses on the income statement.
 Fig1.2 below shows the flow of costs in a manufacturing enterprise
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 Based on the relationship of the costs to the production process, we can
classify costs into prime costs and conversion costs.
 Prime costs- are costs directly related to the production of a product.
 They are all direct manufacturing costs.
 Prime costs = Direct material costs + Direct labor costs
 Conversion costs- are all manufacturing costs other than direct material
costs.
 Also called processing costs, are costs concerned with transforming direct
materials into finished products.
 Conversion costs = Direct labor costs + Manufacturing overhead costs
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 We follow 4 steps mentioned below to prepare income statement and
schedules of costs of goods manufactured in manufacturing company.
 Step 1: Cost of Direct Materials Used Schedule
Step2 :Total Manufacturing Costs Incurred Schedule
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 Step 3: Cost of goods manufactured Schedule
Step4 :Cost of Goods Sold Schedule
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 For last year East Manufacture Company reports
 Revenue $420,000
 DM used 152,000
 Beginning DM inventory 22,000
 Direct manufacturing labor 18,000
 Indirect manufacturing costs 40,000
 Ending DM inventory 16,000
 Beginning FG inventory 35,000
 Beginning WIP inventory 16,000
 Ending WIP inventory 14,000
 Operating costs 124,000
 Costs of goods sold 218,000
Compute
a) MD purchased
b) Total manufacturing cots incurred
c) Costs of goods manufactured
d) Ending FG inventory
e) Operating income
f) Prime costs
1-19g) Conversion costs and h) period costs
1.1.3. The Linear, Curvilinear And Step Functions in Cost Behavior Analysis
 Linear cost function is a mathematical method used by businesses to
determine the total costs associated with a specific amount of production.
 The relationship of the total costs associated with the amount of productions
may be linear or non linear.
 Linear correlation is the measure of a straight-line relationship between two
random variables with values ranging from -1 and 1.
 When two variables are move in the same direction, the relationship said to
be a positive correlation, the best example is variable cost.
 i.e. The expenditure on advertisement and the increase in sales.
 When two variables are move in the opposite direction, the increase in
value of one variable results in decrease in the value of another variable the
correlation said to be a negative correlation.
 i.e. The production of vegetables and the prices of vegetables.
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1.1.3. The Linear, Curvilinear And Step Functions in Cost Behavior Analysis
 A curvilinear cost, also called a nonlinear cost, is an irregular cost/expenses
that increases at different rates as total output increases.
 Curvilinear correlation is occur when the ratio of change between two
variables is not constant and unlike variable cost, these have no parameters.
 Happen when the value of one variable increases, the value of another
variable also increases or till a certain point, after which the increase in value
of one variable will result in the decrease in value of the other variable.
 Step costs, also called stair-step costs, are costs that do not change in direct
proportion to increasing levels of activity.
 In other words, step costs are constant at a certain activity level but increase
or decrease when an activity threshold is met.
 Step costs are extremely important to consider when a company is about to
reach a new activity level, unless, they can cause a business to miss out on
profits.(See the detail on Chap 1 of Cost II ppt)
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1.1.4 The Concepts of Cost Units, Cost Centers And Profit Centers
 As one means of controlling, in many manufacturing enterprises cost is
ascertained by cost center or cost unit or by both.
 Cost Center- It is a sections or small parts of a business to which costs
can be charged i.e. a department, a person (sales man), equipment
(machinery) and etc.
 From the functional point of view cost centers can be the following types:
 Production -are those cost centers where actual production work takes
place. e.g. Weaving dept. of textile factory, melting dept. of steel
producing, Corn crushing shop in a sugar mill
 Service - are cost centers which are ancillary to and render services to
production cost centers. e.g. Power house, store room, repair shops,
canteen etc.

 Product unit cost- is the cost of manufacturing a single unit of a product.
 It is made up of the costs of direct materials, direct labor, and overhead.
 These three cost elements are accumulated as a batch or production run of
products is being produced.
 When the batch or run has been completed, the product unit cost is
computed either;
 By dividing the total cost of direct materials, direct labor, and overhead by
the total number of units produced, or
 By determining the cost per unit for each element of the product cost and
summing those per unit costs.
Profit center-is the responsibility accounting center in which the manager
is accountable for revenues and costs.
 In general the concepts of cost units, cost centers and profit centers can
be understood in responsibility accounting which a system that measures
the plans, budgets, actions, and actual results of each responsibility
center.
 There are four types of responsibility centers:
1. Cost center is responsibility center where the manager is accountable
for costs only.
2. Revenue center :-the manager is accountable for revenues only.
3. Profit center:-the manager is accountable for revenues and costs.
4. Investment center:-the manager is accountable for investments,
revenues, and costs.

1.2 The Costing Of Inputs Resources(Product Costs)
 Learning objectives
 Identify the difference between product costs and period costs’
 Identify the nature of product costs and their types.
 Product Costs- terms commonly used when describing manufacturing costs
consists direct material costs, direct manufacturing labor costs, and indirect
manufacturing costs.
 These terms build on the direct versus indirect cost distinction we had
described earlier in the context of manufacturing costs.
 Direct material costs- are the acquisition costs of all materials that eventually
become part of the cost object (work in process and then finished goods)
and can be traced to the cost object in an economically feasible way.
 Acquisition costs of direct materials include freight-in (inward delivery)
charges, sales taxes, and custom duties.
1.2 The Costing Of Inputs Resources(Product Costs)
 Product Costs Cont..
 Direct labor costs- include the compensation of all labor that can be traced to
the cost object (work in process and then finished goods) in an economically
feasible way.
 Examples include wages and fringe benefits paid to machine operators and
assembly-line workers who convert direct materials purchased to finished
goods.
 Direct labor is sometimes referred to as "touch labor" since it consists of the
costs of workers who "touch" the product as it is being made.
 Indirect costs (manufacturing overhead costs)- are all manufacturing costs
that are related to the cost object (work in process and then finished goods)
but cannot be traced to that cost object in convenient way. It consists
several different types of indirect manufacturing costs.

1.3 The Costing Of Outputs Resources( Product Costing Methods )
 After completing this chapter, you should be able to:
 Distinguish between job-order costing and process costing systems.
 Apply accounting for job-order costing system.
 Apply accounting for process costing system.
1.3. Product Costing Methods
 Costing is the process of accumulating, classifying, and assigning direct
materials, direct labor, and factory overhead costs to products, services, or
projects.
 A product costing system is a set of procedures used to account for an
organization’s product costs and to provide timely and accurate unit cost
information for pricing, cost planning and control, inventory valuation, and
financial statement preparation.
 A product costing system is expected to provide unit cost information, to
supply cost data for management decisions, and to furnish ending values for
1-27the materials, work in process, and finished goods inventory accounts. 27
Tuesday, February 14, 2023
 The product costing system enables managers to track costs throughout the
management process.
 It provides a structure for recording the revenue earned from sales and the
costs incurred for direct materials, direct labor, and overhead.
 Because the manufacture of customers’ orders and the manufacture of large
quantities of similar products involve different processes, they generally
require different types of costing systems.
 The two basic types are the job order and process costing systems.
 Before proceeds to the details of two product costing systems, one should be
know the following building-block concepts of costing systems.
a) Cost object.
b) Direct costs of a cost object.
c) Indirect costs of a cost object.
d) Cost pool.
e) Cost-allocation base.
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1.3.1. Job Order Costing System and Its Features
 Firms operating in job-order industries produce a wide variety of products or
jobs that are usually quite distinct from each other.
 Customized or built-to-order products fit into this category, as do services that
vary from customer to customer.
 Examples of job-order processes include printing, construction, furniture
making, automobile repair, and beautician services. In manufacturing, a job
may be a single unit such as a house, or it may be a batch of units such as
eight tables.
 Job-order systems may be used to produce goods for inventory that are
subsequently sold in the general market.
 Often, however, a job is associated with a particular customer order and the
key feature of job-order costing is that the cost of one job differs from that of
another job and must be monitored separately.
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 For job-order production systems, costs are accumulated by job.
 A job order costing system is used by companies that make distinct /unique
or special order units of a product or service.
 Uses a single WIP inventory account to record the costs of all job orders.
 Use document called the job-order cost sheet to accumulates its
manufacturing costs of each job.
 Each sheet has a job-order number that identifies the new job and usually
corresponds to a work-in-process inventory master file.
 Job-order costing follow a normal costing measurement approach: the
actual costs of DMs and DLs are assigned to jobs along with overhead
applied using a predetermined overhead rate.

 The following are characteristics of job order costing system
 Traces manufacturing costs to a specific job order
 Measures the cost of each completed unit
 Uses a single WIP inventory account to summarize the cost of all job orders
 Typically used by companies that make unique or special-order products.
Fig 3.1. Job-order cost sheet.
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Accounting for Job Order Costing System
1. Purchases of materials (direct and indirect) on credit or cash.
Materials Inventory xx
Accounts Payable/Cash xx
2. Use of direct and indirect materials
Work-in-Process inventory xx
Manufacturing Overhead xx
Materials inventory xx
3. For direct and indirect labor Costs:
Manufacturing Overhead xx
4. For overhead applied:
Factory Overhead xx
5. Disposition of underapplied and overapplied overhead costs
Cost of goods sold xx
Overhead costs xx
1-32 And vice versa for overapplied 32
Accounting for Job Order Costing System
6. For Finished Goods Inventory
Finished Goods inventory xx
Work-in-Process inventories xx
7. For Cost of Goods Sold
Cash or Accounts Receivable xx

Sales xx
Cost of Goods Sold xx
Finished Goods Inventory xx
8. Collection of sales on credit
Cash xx
xx
Account receivable
9. Payment for suppliers
Account /Notes payable xx

xx
Cash
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1.3.2. Process Costing System and Its Features
 A process is a series of activities (operations) that are linked to perform a
specific objective.
 Process costing system is used by companies that make masses of identical

or similar units of a product or service that have long, continuous production
runs of identical products.
 It is an operational system characterized by a large number of homogeneous

products or services passing through a series of processes, where each
process is responsible for one or more operations that bring a product one
step closer to completion.
 Companies that produce paint, beverages, bricks, medicine, milk, paper, and
soft drinks are typical users of process costing system.

 In each period, process-costing systems divide the total costs of producing an
identical or similar product or service by the total number of units produced to
obtain a per-unit cost.
 This per-unit cost is the average unit cost that applies to each of the identical
or similar units produced in that period.
 A process costing system first traces the costs of direct materials, direct labor,
and overhead to processes, departments, or work cells and then assigns the
costs to the products manufactured by those processes, departments, or work
cells during a specific period.
 A process costing system uses several work in process inventory accounts,
one for each process, department, or work cell.
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 Process costing system has the following characteristics.
 Traces manufacturing costs to processes, departments, or work cells and
then assigns the costs to products produced.
 Measures costs in terms of units completed during a specific period
 Uses several WIP Inventory accounts, one for each process, department, or
work cell.
 Typically used by companies that make large amounts of similar products.
 The production is continuous and the final product is the result of a sequence
of processes or departments.
 Costs are accumulated by processes or operations or department.
 The products are standardized and home generous.
 The finished product of each but last process becomes the raw material for
the next process.
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1.3.2.1 Production Flows In Process Costing System
 During production in a process costing environment, products flow in a first-in,
first-out (FIFO) fashion through several processes, departments, or work
cells, and may undergo many different combinations of operations.
 Fig 3.2 below illustrates two basic production flows.
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1.3.2.2 Cost Flows In Process Costing System
 Basically the cost flows for a process-costing system is similar to those of a
job-order costing system with exception the following differences.
 First, a job-order costing system accumulates production costs by job, and a
process-costing system accumulates production costs by process.
 Second, the job-order costing system uses a single work-in-process account,
while the process-costing system has a work-in-process account for every
process.
 As products pass through each process, department, or work cell, the process
costing system accumulates their costs and passes them on to the next
process or department.
 Thus at the end of every accounting period, the system generates a report
that assigns the costs that have accumulated during the period to the units
that have transferred out of the process and to the units that are still part of
work in process and the last process transfers the costs to finished goods.
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 In process costing system managers use either FIFO or Weighted average
cost allocation method to assign costs to units completed and transferred out
to the next process and to units still work in process at the end using the
following 5 steps of process costing.
 Step 1: Summarize the flow of physical units of output.
 Step 2: Compute output in terms of equivalent units.
 Step 3: Summarize total costs to account for.
 Step 4: Compute cost per equivalent unit.
 Step 5: Assign total costs to units completed and to units in ending work in
process.
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 And there two major scenarios with 3 simple to complex subsequent cases in
each scenario as illustrated below.
Scenario1: Process Costing with no lost units in the productions
 Case 1- Process costing with zero beginning and zero ending WIP inventory
 Case 2- Process costing with zero beginning and some ending WIP inventory
 Case 3- Process costing with both some beginning and ending WIP inventory
Scenario2: Process Costing when there is lost units in the productions
 Case 1- Process costing with zero beginning and zero ending WIP inventory
 Case 2- Process costing with zero beginning and some ending WIP inventory
 Case 3- Process costing with both some beginning and ending WIP inventory
 In scenario 2, the Unit costs, Lost units, condition of lost units whether it is
normal or abnormal loss are must be determined to have proper allocation
of costs to units completed and still in process in each period.
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Accounting for Process Costing System
1. To record direct materials used in production
Work-in-Process inventories dept A xx
2. To record conversion costs
Work in Process dept A xx

Wages Payable Control Acc/ Depreciation xx
3. To record cost of goods completed and transferred next process
Work in Process dept B xx

Work in Process dept A xx
4. To record the completed product costs( finished goods inventory)
Finished Goods Inventory xx
Work in Process Inventory (the last dept) xx
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Illustration1.3.1
 Pacific Electronics manufacturing Company produces and sells SG-40 model
starts its operation on January 1, 2012. During the month of January, started and
completely assembled, and transferred out to the testing department 400 units as
shown below;
 Work in process, beginning inventory (January 1) --------------0 units
 Started during January----------------------------------------------- 400 units
 Completed and transferred out during January----------------- 400 units
 Work in process, ending inventory (January 31)------------------0 units
Cost data for the month oh January
 Direct material costs added during January-------------------- $32,000
 Conversion costs added during January -------------------------24,000
 Total assembly department costs added during January ---$56,000
Required:Prepare a cost of production report for PE Company for the month of

January using (a)WAM (b) FIFO method
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Illustration 1.3.2
 In February 2012, Pacific Electronics places another 400 units of SG-40 into
production, because all units placed into production in January were completely
assembled, there is no beginning inventory of partially completed units in the
assembly department on Feb1. but only 175 units are completed and transferred
to the testing department and DM 100% completed because all direct materials in
the assembly department are added at the beginning of the assembly process,
however only 60% because complete with respect to conversion costs, because
conversion costs were added evenly during assembly.
 Required Prepare a cost of production report for PE Company for the month Feb
using (a)WAM (b) FIFO method and pass the necessary entries.
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Illustration 1.3.3
 Assembly Department is the intermediary working process department received
from cutting department and transferred to finishing department has beginning
work in process inventory of 3,000 units in process with cost of $5,400
(100%DM,50&CC) the per-unit cost for labor $910 and factory overhead$800.
 Assembly department received 38,000 units from the Cutting Department and
completed and transferred to the Finishing Department totaled 36,000; and units
4,000 units are in process (50% complete as labor and factory overhead) and
1,000 units were lost in process.
 Cost transferred from the preceding department $65,360 and costs added by the
Assembly dept $34,050 for labor; and $30,018 for factory overhead, Prepare cost
of production report for assembling department.
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1.4 Cost Allocations Methods, Joint Products and Byproducts
 Learning objectives
 Understand the concepts and purposes of cost allocation.
 Differentiate among cost objects, cost pools and cost drivers.
 Identify the process of Cost allocation.
 Identify types of cost allocation methods.
 Differentiate categories of joint process outputs and their costs.
 Describe the characteristics of Joint Products.
 Understand the methods of allocating joint & by product costs.
 Apply accounting for joint products and by products.
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1.4.1 Concepts of Cost Allocation
 To support their business activities, all organizations have departments or
centers that provide services within the organization.
 In chapter 2 of this course, you have identified the departments that provide
such services as the primary processes or support services in an
organization’s value chain.
 To ensure its long-term profitability, an organization must include the costs of

these internal services in the full cost of its products or services.
 The full cost includes not only the costs of direct materials and direct labor,
but also the costs of all production and nonproduction activities in the
organization’s value chain that are required to satisfy customers.
 Cost Allocation is the process of assigning or applying collected
1-46indirect costs to cost objects using an allocation base.

Tuesday, February 14, 2023 46
 Cost object, Cost pool and cost driver are well known term have tie cost alloca
tion concepts.
 The process of cost allocation begins with a company’s responsibility centers.
 A responsibility center is an organizational unit whose manager is responsible

for managing the company’s resources.
 The activity of a responsibility center dictates the extent of its manager’s resp
onsibility and there are two categories of cost allocation centers: revenue ce
nters and service centers.
 Revenue centers also called operating (production) center that is directly res
ponsible for producing products or services sold to external buyers.
 Revenue center adds value to a product or service.

 Service also called discretionary cost centers are supporting department that
provides services to operating department within company.
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 The costs of service center assigned to operating or other centers using cost
allocation base, or cost drivers.
 There are three key issues arise when allocating costs from one department
to another ;
 Whether to use a single rate method or a dual rate method
 Whether to use budgeted rate or actual rate and
 Whether to use budgeted quantities or actual quantities
 When using either the single-rate method or the dual-rate method, managers
allocate support-department costs to operating divisions based on either
a budgeted rate or actual rate
 However, the latter approach is neither conceptually preferred nor widely use
d in practice.
 Accordingly, we illustrate the single rate and dual-rate methods next based on
the use of budgeted rates. Consider the following example.
 Example: Central computer Support department has two users operating
divisions: the microcomputer division and the peripheral equipment division.
The following data relate to the 2012 budget:
 Required: Allocate the Company’s Costs for the divisions under:

(a) single rate method and (b) dual rate method.
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a) Single-Rate Method
 In this method, a combined budgeted rate is used for fixed and variable costs.
The rate is calculated as follows:
 Under the single-rate method, divisions are charged the budgeted rate for each
hour of actual use of the central facility.
 The support costs allocated to the two divisions under this method are as follows
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b)Dual rate method
 In dual rate method as single rate method variable costs are assigned based o
n the budgeted variable cost per hour of $200 for actual hours used by each
division.
 However, fixed costs are assigned based on budgeted fixed costs per hour an
d the budgeted number of hours for each division.
 Given the budgeted usage of 8,000 hours for the microcomputer division and 4
,000 hours for the peripheral equipment division, the budgeted fixed-cost rate
$250 per hour ($3,000,000 ÷ 12,000 hours), as before.
 The costs allocated to the microcomputer division
 The costs allocated to the peripheral division
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 1.4.2.Methods of Costs Allocations
 As you probably recall there are three most common methods of assigning inter
nal service costs to operating departments;
1. The direct method
2. Step-Down Method and
3. Reciprocal Method
 See their detail on the text book.
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Illustration 1.4.1
 Assume that the following data is given for BLK co.(with two support departments:
plant maintenance and Information System; and two operating departments:
Machining and Assembly) for the year ended 2018 and its cost ratio given below;
 Allocate support departments costs to operating departments using: (a) DM,

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(b) SDM and (c) RM.
 1.4.1.Categories of Joint Process Outputs and Costs
 Main Product – output of a joint production process that yields high sales value
compared to the sales values of the by products.
 Joint products- outputs of a joint production process that yields two or more
products.
 It refers to a group of products that are produced simultaneously by a common
process.
 A group of joint products is inseparable until the products reach a certain point
where they are divided or split into separate products.
 The point in a joint production process at which individual products can be
identified for the first time is called the split-off point.
 Byproducts- are outputs of a joint production process that have low sales
values compared to the sales values of the main outputs.
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 1.4.1.Categories of Joint Process Outputs and Costs
 Sometimes, byproducts become joint products as a result of changing market
preferences for products.
 The processing costs and material costs that joint products share are called
joint costs, whereas
 Costs incurred after the separation of joint products are called separable costs.
1.5.2. Characteristics of Joint Products
i. produced from the same raw materials in natural proportion.
ii. They are produced simultaneously by a common process.
iii. They comparatively of almost equal value.
iv. They may require further processing after their point of separation
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1.4.3 Methods of cost allocation for Joint Products.
 Accounting for joint products means the apportionment of joint costs to each of
the joint products and there are two basic approaches to allocate joint costs:
Market based and physical measurement
 Physical measures-allocate using tangible attributes of the product such as

pounds, gallons, barrels, and so on
 Market-based-allocate using market-derived data (dollars):

 Sales value at split off –point.
 Net realizable value (NRV).
 Constant gross-margin percentage NRV.
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Illustration 1.4.2.
 A raw milk 110,000 gallons insert into production and produce 25,000 gallons cream
and 75,000 gallons liquid skim. The cream and liquid skim are produced at a total
joint production cost of $400,000 and the selling price per gallon at split-off point for
cream is $8 and liquid skim is $4. Assume the management desire to further process
and sells at higher market value incurring additional cost $280,000 to make 20,000
gallons butter cream & $520,000 to make, 50,0000 gallons condensed milk. After
further processing the selling price per gallon for butter cream is $25 and condensed
milk is 22.
 Allocate the joint cost by using;
1. Physical measures
2. Sales value at split-off point
3. Net realizable value (NRV)
4. Constant gross-margin percentage NRV
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1.4.4 . Accounting for Byproducts
 Although byproducts have relatively low total sales values, the presence of
byproducts in a joint production process can affect the allocation of joint costs.
 We see two methods of accounting for byproducts
 Production method-recognizes byproduct inventory as it is created, and sales a

nd costs at the time production is completed.
 Sales method-delays recognition of byproducts until the time of sales.
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Illustration1.4.3.
The Westlake Corporation processes timber into fine-grade lumber and wood
chips that are used as Mulchin gardens and lawns. Information about these
products follows: Fine-Grade lumber (the main product)sells for $6 per board foot
(b.f.) Wood chips (the byproduct)-sells for $1 per cubic foot (c.f.) Data for July
2012 are as follows:
 The com incurred $250,000 joint costs of which $150,000 for direct materials
and $100,000 for conversion costs. Both products are sold at the split off point
without further processing.
 Required: Allocate byproduct cost to the byproducts by using the production
and sales methods?
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1.5 Activity-Based- Costing and Management
 Activity-Based Costing(ABC) is an approach to costing that focuses on individual

activities as the fundamental cost objects and used to as the basis for assigning
costs to other cost objects such as products or services.
 Method of decision-making that uses ABC information to improve customer
satisfaction and profitability is known as Activity-based management (ABM).
 An activity is an event, task, or unit of work with a specified purpose for example,
designing products, setting up machines, operating machines, and distributing
products.
 To help make strategic decisions, ABC systems identify activities in all functions
of the value chain, calculate costs of individual activities, and assign costs to
cost objects such as products and services on the basis of the mix of activities
needed to produce each product or service.
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 The activity-based costing system sometimes called an activity list or activity

dictionary this because it compiling the list of tasks, and assign costs to cost
objects such as products and services on the basis of the following three
guidelines for refining a costing system;
1. Direct-cost tracing
2. Indirect-cost pools and
3. Cost-allocation bases.
 ABC systems commonly use a cost hierarchy with four levels output unit-level
costs, batch-level costs, product-sustaining costs, and facility-sustaining costs to
identify cost-allocation bases that are cost drivers of the activity cost pools.
 A cost hierarchy categorizes various activity cost pools on the basis of the
different types of cost drivers, or cost-allocation bases, or different degrees of
difficulty in determining cause-and-effect (or benefits-received) relationships.
1-61 AcFn 3031 By Yoseph T Tuesday, February 14, 2023
1. Output unit-level costs - are the costs of activities performed on each individual
unit of a product or service. i.e. ABC system uses molding machine-hours an
output-unit level cost-allocation base to allocate machine operations costs to
products.
2. Batch-level costs- are the costs of activities related to a group of units of a

product or service rather than each individual unit of product or service.
3. Product-sustaining costs (service-sustaining costs)- are the costs of activities

undertaken to support individual products or services regardless of the number
of units or batches in which the units are produced .i.e. design costs.
4. Facility-sustaining costs- are the costs of activities that cannot be traced to

individual products or services but that support the organization as a whole. i.e.
the general administration costs (including top management compensation,
rent, and building security) are facility-sustaining costs.
 There are 7steps to implement ABC system.
1. Identify the Products That Are the Chosen Cost Objects
2. Identify the Direct Costs of the Products
3. Select the Activities and Cost-Allocation Bases to Use for Allocating Indirect
Costs to the Products.
4. Identify the Indirect Costs Associated with Each Cost-Allocation Base
5. Compute the Rate per Unit of Each Cost-Allocation Base
6. Compute the Indirect Costs Allocated to the Products.
7. Compute the Total Cost of the Products by Adding All Direct and Indirect Costs
Assigned to the Products.

1.6 Ethical Behavior for Management Accountant and Financial Managers
 Practitioners of management accounting and financial management have an
obligation to the public, their profession, the organizations they serve, and
themselves to maintain the highest standards of ethical conduct.
 In recognition of this obligation, the Institute of Management Accountants

(IMA)has promulgated the following standards of ethical professional practice.
Adherence to these standards, both domestically and internationally, is integral
to achieving the Objectives of Management Accounting.
 Practitioners of management accounting and financial management shall not

commit acts contrary to these standards nor shall they condone the commission
of such acts by others within their organizations.
 The IMA is just one of many institutions that help navigate management
accountants through what could be turbulent ethical waters.

IMA STATEMENT OF ETHICAL PROFESSIONAL PRACTICE

 Practitioners of management accounting and financial management shall
behave ethically.
 A commitment to ethical professional practice includes overarching

PRINCIPLES that express our values and STANDARDS that guide our conduct.
PRINCIPLES
 IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and
Responsibility.
 Practitioners shall act in accordance with these principles and shall encourage
others within their organizations to adhere to them.
STANDARDS
 A practitioner’s failure to comply with the following standards may result in
disciplinary action.
Competence Each practitioner 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.
Confidentiality Each practitioner 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.

Integrity Each practitioner 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.
Credibility Each practitioner 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.

PARTII: COST AND MANAGEMENT ACCOUNTING II
Course Contents
1. cost-volume-profit analysis, absorption and

variable costing
2. relevant information and decision making
3. information for budgeting, planning and control
purposes
4. standard costing, flexible budgeting and variance
analysis
5. pricing of goods and services
6. responsibility accounting

Part II: Learning Objectives
 Under this particular section you should be able to;
1. Understand the concepts of cost-volume-profit analysis.
2. Differentiate absorption and variable costing.
3. Identify decision making process and the relevant information.
4. Prepare master budget and control purposes.
5. Differentiate static budget and flexible budget and their variances.
6. Be able to pricing goods and services.
7. Explain responsibility accounting and its components.
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2.1.COST-VOLUME-PROFIT ANALYSIS, ABSORPTION, AND VARIABLE COSTING
2.1. Cost-Volume-Profit (CVP) Analysis

 Cost-volume-profit (CVP) analysis studies the behavior and relationship among
revenues, costs and operating income as changes occur in the units sold, the
selling price, the variable cost per unit, or the fixed costs of a product.
 Managers should know how behave so as to select the course that will best
generate income for an organization’s owners, maintain liquidity for its creditors,
and use the organization’s resources responsibly.
 Analysis of cost behavior is important not only in achieving profitability, but also
in using resources wisely.
 Understanding the behavior of cost depend on cost drivers and full operating
capacity within its relevant range.
 The four capacity levels are theoretical capacity, practical capacity, normal
capacity utilization, and master-budget capacity utilization.
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 Cost-volume-profit (CVP) analysis is a powerful tool that aid managers to make

decide on;
What products and services to offer,
What prices to charge,
What marketing strategy to use,
What cost structure to implement,
What to be the breakeven point, and so on
 CVP analysis focuses on how profits are affected by the following five factors:
1. Selling prices.
2. Sales volume.
3. Unit variable costs.
4. Total fixed costs.
5. Mix of products sold.
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 CVP analysis has a strategic role in the early, during and after phases of the
cost life cycle of products or services in automation, outsourcing, and total
quality management.
 Managers apply CVP analysis using the following 5 steps.
1. Identify the problem and uncertainties.
2. Obtain information.
3. Make predictions about the future.
4. Make decisions by choosing among alternatives.
5. Implement the decision, evaluate performance, and learn.
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 The following are the key Assumptions of CVP.

1. Changes in the level of revenues and costs arise only because of changes in
the number of product (or service) units produced and sold.
2. Costs are linear and can be accurately divided into variable and fixed
elements.
3. When graphed, the behavior of total revenues and total costs is linear (straight-
line; y=a+bx) in relation to output units within the relevant range.
4. The unit selling price, unit variable costs, and total fixed costs are known and
constant over the entire relevant range.
5. The analysis covers either a single product or sales mix when multiple
products are sold will remain constant as the level of total units sold changes.
6. All revenues and costs can be added and compared without taking into
account the time value of money.
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2.1.COST-VOLUME-PROFIT ANALYSIS, ABSORPTION, & VARIABLE COSTING
 CVP analysis applied on the following concepts;

1. Contribution Margin
2. Gross margin
3. Break Even Analysis
4. Linear Demand and Supply Analysis
5. Target Profit Analysis
6. The Margin of Safety Analysis
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2.1.COST-VOLUME-PROFIT ANALYSIS, ABSORPTION, & VARIABLE COSTING
2.1.2. Absorption, And Variable Costing

 Managers in industries with high fixed costs, like manufacturing, must manage
capacity levels and make decisions about the use of available capacity, a
production and inventory policy.
 The former one is achieved using the four possible choices of capacity levels we
discussed above and
 The later one is determine using the three common types of inventory costing
methods:
 Absorption costing ,
 Variable(direct) costing and
 Throughput costing.
 The inventory-costing choice determines which manufacturing costs are treated
as inventoriable costs. (see their detail on ppt you learnt previous time)
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2.2. RELEVANT INFORMATION AND DICISION MAKING
 2.2.1 Introduction to Relevant Information and Decision Making Process
 Decision making is a complex tasks and is a process of choosing among a set of

alternative courses of action with a view to attain the firm's objectives about;
 The acquisition of equipment,
 Mix of product,
 Method of production and
 Pricing of product and services confront managers in all types of organizations.
 These complex tasks which is a future-oriented activity; it involves forecasting

and planning is set by every manager intelligently using a decision model for
choosing among different courses of action.
 A decision model is a formal method of making a choice between alternatives

that often involves both quantitative and qualitative analyses.
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 2.2.1 Introduction to Relevant Information and Decision Making Process
 A manager should take the following the 5 steps decision process highlighted
in chap 1 to make decisions intelligently and skillfully.
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 2.2.2 The concept of Relevant and Irrelevant Costs and Benefits

 To be successful in decision-making, managers must have tools at their
disposal to assist them in distinguishing between relevant and irrelevant costs
so that the latter can be eliminated from the decision framework.
 A business decision may be;
1. Unique decisions
2. Repetitive (routine) decisions
 In any situation cost and managerial accountants analyze, and provide relevant
information to the production, marketing and finance managers who make the
ultimate decisions, and
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 Managers require information pertinent to their decisions so a s to be effective
between the costs and the benefits alternatives are relevant in in their decision
making.
 In each decision situation the manager must examine the data at hand and then
take the steps necessary to isolate the relevant costs and revenues.
 Relevant costs are expected future costs, and relevant revenues are expected
future revenues that differ/avoidable among the alternative courses of action
being considered.
 Costs and revenues to be relevant they must occur in the future and differ
among the alternative courses of action.
 Costs which do not change as a result of decision and those do not bearing on
the future are irrelevant/unavoidable costs.
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 Exhibit below provides the key features of relevant information
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 Managers divide the outcomes of decisions into two broad categories:

quantitative and qualitative factors.
 Relevant-cost analysis generally emphasizes quantitative factors that can be

expressed in financial terms.
 However, managers must wisely weight the qualitative factors and quantitative
nonfinancial factors and do not make them unimportant.
 Comparing and trading off nonfinancial and financial considerations is seldom
easy.
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 2.2.3 Choosing Output Levels for Relevant Information

 The concept of relevance applies to all decision situations and the following are
the most common situations of relevance decision making areas;
Special Orders
Insourcing-versus-outsourcing(Make-versus-buy) decisions
product-mix decisions with capacity constraints
Customer profitability, activity-based costing, and relevant costs
Irrelevance of past costs and equipment-replacement decisions
Decisions and performance evaluation
Pricing of goods and services
Joint costs and further processes
Inventory management and supplier evaluation
Capital investment and transfer pricing.
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2.3. INFORMATION FOR BUDGETING, PLANNING AND CONTROL PURPOSES
2.3.1 Introduction to Budgeting and Budgetary Systems
 A budget is quantitative expression includes both financial and nonfinancial

aspects of planned operations and projects.
 The budget is both a guideline for operations and a projection of the operating
results for the budgeted period, “ is a tool for planning and a control”, “What
resources to spend to attained goal(s)?”
 The process of preparing a budget is called budgeting and is treated as the

process of allocating scarce resources among unlimited demands.
 A budget has its own advantages and roles in both short-term and long-
term(strategic) plan formulation and execution.
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2.3.2 The budgeting process and The budgetary systems
 The Budgeting process can range from the informal simple processes small
firms use that take only days or weeks to complete to elaborate, lengthy
procedures large firms or governments employ that span months from start to
final approval.
 The process usually includes;
The formation of a budget committee;
The budget period;
Specification of budget guidelines;
Preparation of the budget proposal;
Budget negotiation, review, and approval; and
Budget revision and evaluation.

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2.3.2 The budgeting process and The budgetary systems
 Over the years alternative approaches have been used to budget preparation
and improve operations.
 Nowadays there are 3 common types of budgetary systems which differ to each
other in their emphasis on planning, control and evaluation;
 Zero-Base-Budgeting (ZBB)
 Activity-Based Budgeting(ABB)
 kaizen(Continuous Improvement) budgeting
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2.3.3 Master Budget preparation for Manufacturing Companies

 We have said that budget roles in both short-term and long term plan
formulation and execution, the short-run planning(operating plan need short-
term budgets and the long run panning/strategic plan need long-run budgets.
 The short-term budget is master budget and the long run budget is capital
budget.
 The capital budget, which details plans for the acquisition and replacement of
major portions of property, plant, and equipment, whereas;
 Master budget is a continuous budget covers one year and is broken down into
monthly or quarterly units so as to achieve short-term objectives.
 A master budget is a comprehensive budget for a specific period consists of a
capital budget and a set of interrelated operating and financial budgets.
 Exhibit below delineates the relationships among components of a master
budget
1-86 for a hypothetical manufacturing firm.
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 As you can see on figure above, the capital budget includes budgets to support
strategic initiatives, programs, and projects.
 Operating budgets are plans for all phases of operations and include
production, purchasing, personnel, and marketing budgets and its process
generally ends with preparation of the budgeted income statement.
 Financial budgets identify sources and uses of funds for budgeted operations
and capital expenditures and its process ends with preparation of budgeted
balance sheet.
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 As you can see on figure above, the capital budget includes budgets to support
strategic initiatives, programs, and projects.
 Operating budgets are plans for all phases of operations and include
production, purchasing, personnel, and marketing budgets and its process
generally ends with preparation of the budgeted income statement.
 Financial budgets identify sources and uses of funds for budgeted operations
and capital expenditures and its process ends with preparation of budgeted
balance sheet.
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2.3.4 Master Budget in Merchanising and Service sectors Companies
 A merchandising firm does not have a production budget; instead, it prepares a

merchandise purchases budget.
 A merchandise purchases budget shows the amount of merchandise needs to

purchase during the period.
 The basic format of a merchandise purchases budget is the same as the

production budget shown as you have learnt in cha3 cost-II, with exception of
the last items in a merchandise purchases budget are budgeted purchases
instead of budgeted production.
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2.3.4 Master Budget in Merchanising and Service sectors Companies
 Service companies have different characteristics, and concerns in budgeting

than those of manufacturing and merchandising firms.
 Similar to budgeting for manufacturing or merchandising firms, budgeting for

service firms consists of an integrated set of plans for an upcoming period.
 The difference is in the absence of production or merchandise purchase

budgets and their ancillary budgets.
 A service organization achieves its budgeted goals and fulfills its mission
through providing services.
 Therefore, an important focal point in its budgeting is personnel planning and a

service firm must ensure that it has personnel with the appropriate skills to
perform the services required for the budgeted service revenue.
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2.3.5 Uncertainty and the Budgeting Process
 The preceding sections provides an overview of the master budgeting process,

which culminates in a set of pro forma (budgeted) financial statements.
 So that, the validity of these statements is directly affected by the accuracy of

the forecasted data going into the component budgets, because they are
forecasts and are subject to various levels of uncertainty.
 Spreadsheet software (such as Excel) used to deal with uncertainty associated

with the budget preparation.
 There are two common uncertainty analyses in budgeting process;
1. What -if analysis and
2. Sensitivity analysis.
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2.3.6 Behavioral Issues in Budgeting

 A budget can be successful only if those responsible for its implementation
make it happen, and
 To encourage a successful budgeting process management must consider a
various behavioral issues listed below;
1. Budgetary slack/padding
2. Goal congruence
3. Authoritative or participative budgeting
4. Difficulty level of the budget target and
5. Linkage of compensation and budgeted performance
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2.4. STANDARD COSTING,FLEXIBLE BUDGETING AND VARIANCE ANALYSIS
2.4.1. Introduction to Flexible Budget and Variance Analysis
 A variance is the difference between actual results and expected performance.
 Lie at the point where the planning and control functions of management come
together.
 Assist managers in implementing their strategies by point out an exception

areas not operating as anticipated.
 In other words, by highlighting the areas that have deviated most from
expectations it help managers to focus their efforts on the critical areas.
 Variances are used in performance evaluation and to change a strategy
 A single variance may be the result of many different problems.
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2.4.1. Introduction to Flexible Budget and Variance Analysis
 Variance analysis used to understand why variances arise and to evaluate and
learn the current performance.
 It also enable managers to generate more informed predictions about the future,
and thereby improve the quality of the five-step decision making process.
 The management evaluate its performance at the end of the period whether the
planned operating income was attained or not.
 The management should rely on a combination of both financial and

nonfinancial performance measures so as to determine variances.
 This variance is measured the actual outcomes against either static or flexible
budgets for the period.
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2.4.2. Static Budget and Its Variance

 The static also called master or fixed budget, is a budget based on the level of
output planned at the start of the budget period and developed for only a single
(static) planned output level.
 It lays out expectations and provides blueprints of operations for the coming
period.
 Based solely on the planned volume of activity, usually used by stable
companies and operations independent from capacity levels.
 Is applicable when;
sales are predictable
easy to anticipate demand
business is independent to the notions of nature
progress independent to size of supply of labor, capacity and other inputs
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 The difference between the actual result and budgeted amount in the static
budget is called Static Budget Variance.
 The variance result may be favorable(F) or unfavorable(U).
 For revenue items, F means actual revenues exceed budgeted revenues.
 For cost items, F means actual costs are less than budgeted costs.
 U:has the effect of decreasing operating income relative to the budgeted
amount and U is also called adverse variances.
 An unfavorable variance may be due to poor planning and it suggests further
investigation, not conclusive evidence of poor performance.
 A favorable variance may not be good news at all because it adversely affects
other variances that increase total costs.
 Hence both F&U variances considered by the management.
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 Managers want to know how much of the static-budget variance is because of

inaccurate forecasting of output units sold and how much is due to poor
performance in manufacturing and selling activities happen.
 Managers, therefore, create a flexible budget, which enables a more in-depth

understanding of deviations from the static budget.
 Hence the static-budget variance can be subdivided into;

 The flexible-budget variance and
 The sales-volume variance.
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2.4.3 Flexible Budget and Its Variance
 A flexible budget calculates budgeted revenues and budgeted costs based on

the actual output in the budget period.
 The flexible budget is prepared at the end of the period, after the actual outputs
are known.
 The flexible budget is the hypothetical budget that would have prepared at the
start of the budget period if it had correctly forecast the actual outputs.
 In other words, the flexible budget is not the plan that initially had in mind
instead, it is the budget that would have put together for the period if it knew in
advance that the actual output for the period would have been known.
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 In preparing the flexible budget, one should note that the following amounts are
same in flexible and in static budget during the period;
 The budgeted selling price
 The budgeted unit variable cost and
 The budgeted total fixed costs
 Therefore, the only difference between the static budget and the flexible budget
is that the static budget is prepared for the planned outputs, whereas the flexible
budget is based on the actual outputs.
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 Flexible budget develops using the following three steps;
1. Identify the actual quantity of output.
2. Calculate the flexible budget for revenues based on budgeted selling price and
actual quantity of output.
3. Calculate the flexible budget for costs based on budgeted variable cost per
output unit, actual quantity of output, and budgeted fixed costs.
 These three steps enable one to prepare a flexible budget, and
 The flexible budget allows for a more detailed analysis of the static-budget
variance for operating income.
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Generally flexible budgets are prepared when;
Sales are unpredictable
Difficult to anticipate demand
Business is subject to the notions of nature.
Progress depends on size of supply of labor, capacity and other inputs.
Cover range of activity, dynamic and facilitate performance measurement.
 A company would not need to use a flexible budget if it had perfect foresight
about actual output units.
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 Flexible budget variance is the difference between any line-item in the flexible
budget and the corresponding line-item from the statement of actual results.
 Flexible budget variance is prepared to know;
Sales-volume variance
Price variance,
Direct Materials Variances,
Direct Labor Variance also called wage rate variance,
Efficiency/Performance Variance
 Hence the flexible budget is known as a performance evaluation tool.
 See their detail on the text and ppt from Chap iv cost-II.
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2.4.4 Investigations Variance
 Identifying and reporting costs of variances are the first steps in reducing
variances and improving financial performance, however, not all variances call
for investigation and corrective action.
 So that variances should be investigated when there is a small variance for

critical items such as product defects and sales voilatability.
 In general, the proper response to a variance depends on the causes and

degree of controllability of the variance.
 The causes and the controllability of variances fall into two categories:
 Random and
 Systematic.
 Exhibit 15.16 below provides the causes of variances and controllability of
variances and actions to be taken by the management.
1-104
1-105
2.5. PRICING OF GOODS AND SERVICES
2.5.1Introduction to Pricing of Goods and Services

 As you recall from Chap 5 of Cost-II, how companies price a product or a
service ultimately depends on the demand and supply for it and there are 3
factors affecting demand and supply;
 Customers,
 Competitors, and
 Costs.
 In competitive markets price is affected by customers, competitors, and costs
whereas;
 In less competitive markets price is the customer’s willingness to pay it and
 Hence companies must always examine their pricing through the eyes of their
customers
1-106
2.5.1 Introduction to Pricing of Goods and Services

 Managers consider pricing decisions in;
 Short run &
 Long run perspectives and
 There are two different approaches for long run pricing decisions;
 Market-Based Approach and
 Cost-Based(Cost-Plus) Approach
 In addition to customers, competitors, and costs pricing of goods and services
decision affected by
 Life -cycle product budgeting and costing
 Customer life-cycle costing
 Transfer pricing
1-107
2.5.2 Additional Considerations Pricing Decision

 In some cases, cost is not a major factor in setting prices and in that case there
are some market structures and laws and regulations influence price setting
outside of cost;
 Price discrimination
 International considerations
 Antitrust Laws
 Predatory Pricing
 Dumping and
 Collusive Pricing
1-108
1-109 AcFn 3032 By Yoseph T Monday, March 27, 2023

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STUDY GUIDELINES MATERIAL FOR EXIT EXAM

THEMATIC AREA: COST AND MANAGERIALACCOUNTING

COURSES: COST AND MANAGEMENT ACCOUNTING I & II

Compiled By Yoseph Tadesse (MSc)

Differentiate among Cost Accounting, Managerial Accounting & Financial

Identify cost classifications and their behaviors.

Describe the uses of linear, curvilinear and step functions, and

State the ethical considerations in Management Accounting.

 The major function of cost accounting is cost accumulation for inventory

 Management accounting, however, emphasizes the use of the cost data

 We use cost management to describe the approaches and activities of

 A value-adding cost is the cost of an activity that increases the market

 i.e. the costs of value chain in manufacturing company

 A given cost can be treated as relevant or irrelevant, avoidable or

 For financial reporting purpose

 For financial reporting purpose costs can be a Product (inventoriable)

 A given cost can be treated as relevant or irrelevant, avoidable or

 For financial reporting purpose

 For financial reporting purpose costs can be a Product (inventoriable)

 Fig1.2 below shows the flow of costs in a manufacturing enterprise

 Prime costs- are costs directly related to the production of a product.

 They are all direct manufacturing costs.

 Prime costs = Direct material costs + Direct labor costs

 Conversion costs = Direct labor costs + Manufacturing overhead costs

 Step 1: Cost of Direct Materials Used Schedule

Step2 :Total Manufacturing Costs Incurred Schedule

Step4 :Cost of Goods Sold Schedule

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1-24 Tuesday, February 14, 2023 24

1-26 Tuesday, February 14, 2023 26

1-30 Tuesday, February 14, 2023 30

Cash or Accounts Receivable xx

Account /Notes payable xx

 Process costing system is used by companies that make masses of identical

 It is an operational system characterized by a large number of homogeneous

1-34 Tuesday, February 14, 2023 34

following 5 steps of process costing.

 Step 1: Summarize the flow of physical units of output.

 Step 2: Compute output in terms of equivalent units.

 Step 3: Summarize total costs to account for.

 Step 4: Compute cost per equivalent unit.

Work in Process dept A xx

Work in Process dept B xx

Required:Prepare a cost of production report for PE Company for the month of

 Differentiate among cost objects, cost pools and cost drivers.

 Identify the process of Cost allocation.

 Identify types of cost allocation methods.

 Differentiate categories of joint process outputs and their costs.

 Describe the characteristics of Joint Products.

 Understand the methods of allocating joint & by product costs.

 Apply accounting for joint products and by products.

 To ensure its long-term profitability, an organization must include the costs of

 Cost Allocation is the process of assigning or applying collected

1-46indirect costs to cost objects using an allocation base.

 The process of cost allocation begins with a company’s responsibility centers.

 A responsibility center is an organizational unit whose manager is responsible

 Revenue center adds value to a product or service.

 Required: Allocate the Company’s Costs for the divisions under:

 The costs allocated to the peripheral division

1. The direct method

2. Step-Down Method and

 See their detail on the text book.

 Allocate support departments costs to operating departments using: (a) DM,

Cost & Managerial Accounting Study Material

Cost & Managerial Accounting Study Material