LEARNING OBJECTIVES

Definition & Branches

Managerial Cost Concepts
of Accounting

Managerial Accounting

Organizational Structure
ACCOUNTING

Accounting is a service activity which function is to provide

quantitative information, primarily financial in nature, about
economic entities that is intended to be useful in making
economic decisions.
ACCOUNTING

Accounting is a service activity which function is to provide

quantitative information, primarily financial in nature, about
economic entities that is intended to be useful in making
economic decisions.
ACCOUNTING

Accounting is a service activity which function is to provide

quantitative information, primarily financial in nature, about
economic entities that is intended to be useful in making
economic decisions.
ACCOUNTING

Accounting is a service activity which function is to provide

quantitative information, primarily financial in nature, about
economic entities that is intended to be useful in making
economic decisions.
ACCOUNTING

Accounting is a service activity which function is to provide

quantitative information, primarily financial in nature, about
economic entities that is intended to be useful in making
economic decisions.
ACCOUNTING

Branches of Accounting

Financial Accounting Managerial Accounting

It is an internally-based
This branch of accounting is more accounting that helps managers
focused on the recording of make decisions through the use
business transactions and of economic and financial
preparation of financial information and it is also used to
statements for external users. measure the results of those
decisions.
ACCOUNTING

Financial Accounting Management Accounting

Primary Users External users: stockholders, Internal users: officers and managers
creditors, and regulators.
Types & Frequency of Financial statements Internal reports
Reports Historical Historical & Future-Oriented
Quarterly and annually As frequently as needed
Special-purpose for specific
Purpose of Reports General-purpose
decisions
Content of Reports Pertains to business as a whole Pertains to subunits of the business
Highly aggregated (condensed) Very detailed
Limited to double-entry accounting Extends beyond double-entry
and cost data accounting to any relevant data
Governed by GAAP Not governed by standard, as long as
relevant to decision
Verification Process Audited by a CPA No independent audits
MANAGERIAL ACCOUNTING

Objectives

1 Provide management with information for decision-

making and planning.
2 Assist managers in directing and controlling operations.

3 Motivate managers toward achieving organization’s goals.

4 Measure performance of managers and sub-units within the

organization.
MANAGERIAL ACCOUNTING

Management Functions

1 Planning 3 Controlling
Decision
2 Directing • Performance Evaluation Making
ORGANIZATIONAL STRUCTURE

Stockholders

Board of
Directors

President/CEO

Corp. Secretary VP-Marketing VP-Finance/CFO VP-Operations VP-HR

Treasurer Controller Internal Audit

MANAGERIAL COST CONCEPTS

Cost is an amount that has to be paid or given up in order

to get something.

In business, cost is usually a valuation of (1) effort, (2)

material, (3) resources, (4) time and utilities consumed, (5)
risk incurred, and (6) opportunity foregone in production
and delivery of goods or services.
MANAGERIAL COST CONCEPTS

Classification of Costs

Product Costs Materials Labor Overhead

• Direct • Direct • Indirect

This is the sum of the costs Materials Labor production
incurred to manufacture a costs
• Indirect • Indirect
product. These costs are Materials Labor
first charged to inventory
and subsequently expensed Direct Materials + Direct Labor = Prime Costs
when the products are sold.
Direct Labor + Overhead = Conversion Costs
MANAGERIAL COST CONCEPTS

Classification of Costs
Carpenter:
Wood: Direct
Direct Labor
Material

Wood glue,
varnish, nails
and sandpapers: Electricity: QA Inspector:
Indirect Material Other overhead Indirect Labor
MANAGERIAL COST CONCEPTS

Classification of Costs

Period Costs Selling Expenses General & Admin

• These are the costs • General expenses pertain

These are non- associated with to operational overhead
manufacturing costs. These distributing, expenses that impact the
are costs that are matched marketing and selling entire business.
with the revenue of a a product or service.
• Administrative expenses
specific time period rather
are expenses that cannot
than included as part of the be directly tied to a
cost of a salable product. specific function within
the company.
MANAGERIAL COST CONCEPTS

Classification of Costs

Joint Costs Separable Costs

Joint costs are costs

incurred in a single process These are costs that are
that yields two or more separately incurred by a
products. These are product. They are incurred
production costs incurred up after the joint products are
to the point where the separated in the split-off
products are separately point.
identified.
MANAGERIAL COST CONCEPTS

Classification of Costs
Split-off point

Joint costs Separable costs

MANAGERIAL COST CONCEPTS

Classification of Costs

Opportunity Costs Sunk Costs

These are costs that have

These represents the
already been incurred and
benefits foregone because
will not be changed or
one course of action is
avoided by any future
chosen over the other.
decision.
MANAGERIAL COST CONCEPTS

Classification of Costs

Relevant Costs Irrelevant Costs

A cost is considered
These are costs that will
relevant if it will affect the
not change the decision of
decision of the manager.
the manager across
For a cost to be relevant it
alternative courses of
must be both future and
actions.
differential.
MANAGERIAL COST CONCEPTS

Classification of Costs

Assume you are deciding whether to retain an old production

equipment or purchase a new one, the following cost information are
available:

Retain Replace
Price of new - P120,000
equipment
Direct factory costs 640,000 500,000
Indirect factory costs 350,000 350,000

The old equipment was acquired 5 years ago at P110,000.

MANAGERIAL COST CONCEPTS

Classification of Costs

Budgeted Costs Out of Pocket Costs

These are expenditures not

These costs refer to included as part of the
planned or predetermined budget but must be
costs stated on a formal incurred in order to
budget developed by the complete a proposed
company. project or to extend an
activity undertaken.
MANAGERIAL COST CONCEPTS

Classification of Costs

Committed Costs Discretionary Costs

These are costs that cannot These are costs that can be
be eliminated from the eliminated temporarily from
budget without affecting the budget based on
the operations and/or management’s discretion to
incurring a legal obligation. do so.
MANAGERIAL COST CONCEPTS

Classification of Costs

Controllable Costs Non-controllable Costs

These are costs that are

primarily subject to the These are costs that cannot
influence of a given be controlled or influenced
manager for a certain by a particular manager.
period of time.
MANAGERIAL COST CONCEPTS

Classification of Costs

Fixed Costs Variable Costs

• Constant in total but vary
• Vary in total but constant
on a per unit basis within
on a per unit basis within
the relevant range of
the relevant range of
activity
activity
• The fixed cost per unit
• The total variable cost
has an inverse
has a direct relationship
relationship with the
with the activity level
activity level
ASSESSMENT(S)

(Pages 7-8)

➢ Activity 1
➢ Activity 2