ACCOUNTING FOR

DECISIONS
Dr. Debojyoti Das 1
Assistant Professor and Young Faculty Research Chair
Indian Institute of Management Bangalore

03/09/2022
 FINANCIAL VS MANAGERIAL
ACCOUNTING
Financial Accounting Managerial Accounting

Focus External users of information Internal users of information

Nature Mainly monetary information Monetary and more non-monetary

information
Orientation Backward-looking, i.e., past Forward-looking, i.e., future policy
information decisions

03/09/2022 2
 CLASSIFICATION OF COSTS
Cost

Costs that remain constant Costs that increase or decrease

when there are changes in the in proportion to increases or
level of business activity. Fixed Variable decreases in the level of
business activity.

03/09/2022 3
IDENTIFY COSTS
1. Depreciation
2. Commission on sales
3. Interest paid on capital
4. Rent expense
5. Wages of part-time workers
6. Raw materials
7. Power for running production machinery
8. Managerial incentives

03/09/2022 4
IDENTIFY COSTS
 Florence Electricity Board provides monthly electricity supply @Rs.
6000 for 100 units of power. Usage above 100 units is charged @Rs.
85 per unit.
How to classify the electricity expenses if 200 units of power are consumed?
A semi-variable cost is a cost composed of a mixture of both fixed and
variable components.

Why semi-variable and not semi-fixed?

03/09/2022 5
IDENTIFY COSTS
 Scenario I: Florence Electricity Board provides monthly electricity
supply @Rs. 6000 for 100 units of power. Usage above 100 units is
charged @Rs. 85 per unit.
[Variable cost per unit > Fixed cost per unit ]
[Semi-Variable Cost]
 Scenario II: Florence Electricity Board provides monthly electricity
supply @Rs. 8500 for 100 units of power. Usage above 100 units is
charged @Rs. 60 per unit.
[Variable cost per unit < Fixed cost per unit ]
[Semi-Fixed Cost]
03/09/2022 6
OTHER COST CLASSIFICATIONS
 Sunk cost: a cost that has already been incurred and that cannot
be recovered.
 Opportunity cost: the value of benefits forgone.

03/09/2022 7
OTHER COST CLASSIFICATIONS
 Controllable and non-controllable cost
 A plant supervisor can control material and labour costs. (Controllable Cost)

 However, if insurance or advertising costs are high, the supervisor cannot do

anything. (Uncontrollable Cost)
03/09/2022 8
PRACTICE PROBLEMS
 Exercise 1.15, 1.16, 1.17, 1.18, 1.20
 Problem 1.1, 1.2, 1,3, 1.4, 1.5, 1.6, 1.8

03/09/2022 9
SUGGESTED SOLUTION 1.6
a) The information on the income statement, balance sheet and cash flow
statement is highly summarized for the entity as a whole. Brinda needs
product-level information, which is much more detailed.
b) Examples of non-financial measures might be: Website visits, number of
repeat customers, delivery time, and customer satisfaction.
c) Brinda could improve customer satisfaction ratings by offering discounts,
improving delivery time, improving customer service, and improving quality.
d) Examples of costs in Brinda’s operation are the cost of clock dials (variable),
depreciation of computing equipment (fixed), salaries of information
technology staff (fixed), and shipping (variable).

03/09/2022 10
SUGGESTED SOLUTION 1.8
a) Incremental revenue will be $640 ($160 x 4).
b) Incremental costs would include, for example, the cost of soap and shampoo,
the cost of cleaning the room, and the cost of cleaning towels and bedding.
c) Most likely, the incremental revenue will exceed the incremental costs,
which are relatively low (e.g., shampoo and soap are inexpensive and
cleaning personnel are paid fairly low wages).

03/09/2022 11
03/09/2022 12
TRACKING COSTS

Total Cost of Production = Rs. 5,00,000

Number of units produced = 1,00,000

Process-Costing
03/09/2022 13
TRACKING COSTS

Job 1 Job 2 Job 3 Job 4

Job-Costing
03/09/2022 14
COST COMPONENTS (FURNITURE
MANUFACTURING)

 Direct Material:

 Direct Labour:

 Manufacturing Overheads (Indirect Materials + Indirect Labour)

03/09/2022 15
PRACTICE PROBLEMS
 E 2.3, E 2.9, E 2.10, E 2.15, E 2.16
 P 2.1, P 2.2, P 2.5, P 2.6, P 2.7

03/09/2022 16