BASIC CONCEPTS IN MANAGEMENT ACCOUNTING;

COSTS AND COST CONCEPTS

MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING – the process of identifying, measuring, accumulating, analyzing,

preparing, interpreting, and communicating information that helps managers fulfill
organizational objectives.

MANAGEMENT ACCOUNTANT - a person who provides financial data and advice to a company for
use in the organization and development of its business.

FUNCTIONS/OBJECTIVES OF MANAGEMENT ACCOUNTING:

The basic function of management accounting is to assist management in performing its functions
effectively. The functions of management are planning, organizing, and controlling. It also
provides information that may be used by management for decision-making.

MANAGEMENT FUNCTIONS AND THE NEED FOR MANAGEMENT ACCOUNTING INFORMATION

1. PLANNING – involves:
a. setting of immediate, as well as long-range goals for the organization;
b. predicting future conditions that are expected to prevail;
c. considering the different means or strategies by which the goals set may be achieved; and
d. deciding which of the strategies should be used to attain such goals.

2. ORGANIZING – process of bringing together physical, financial, and human resources and
developing productive relationships amongst them for achievement of organizational goals

3. STAFFING – the function of manning the organization structure and keeping it manned.

4. DIRECTING AND MOTIVATING – involves overseeing the day-to-day activities, seeing to it that the
organization is functioning smoothly, and the members of the organization are mobilized to carry out plans.

5. CONTROLLING – involves checking the performance of activities against the plan or standards set
and deciding what corrective actions to take should there be any deviation between the actual and
planned/standard performance.
➢ All the aforementioned management functions involve decision-making. In performing the
decision-making function, managers need information. Such information is provided by management
accountants.

MANAGEMENT ADVISORY SERVICES – (also called management consulting services, business advisory
services, management services) - refers to that area of accounting work concerned with providing advice
and technical assistance to help clients improve the use of their resources to achieve their goals.

CHARACTERISTICS OF MAS
1. Services are rendered for the management rather than for third parties.
2. Involves problem solving.
3. Relates to the future.
4. Broad in scope.
5. Involves varied assignments.
6. Engagements are usually non-recurring.
7. Engagements require highly qualified staff.
8. Human relations play a vital role in each engagement.
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MANAGEMENT ACCOUNTING vs. FINANCIAL ACCOUNTING

MANAGEMENT ACCOUNTING
FINANCIAL ACCOUNTING

RESTRICTIVE No regulatory guidelines PFRS/ GAAP/ PAS

GUIDELINES

External users: stockholders,

Internal users: officers and managers creditors, concerned government
USERS OF
INFORMATION (Specific Purpose FS) agencies
(General Purpose FS)

Different types of reports, such as budgets,

Primarily financial statements and
TYPES OF financial projections, cost analyses, etc.,
REPORTS the accompanying notes to such
depending on the specific needs of
statements.
management.

EMPHASIS
Relevance Reliability
OF (Timeliness) (Precision)
REPORTING

Financial Financial and non-financial.

TYPE OF
INFORMATION

Focus of reports is on the company’s value

REPORTING Financial reports relate to the
ENTITY chain, such as a business segment,
business as a whole.
product- line, supplier, or customer.

Reports may cover any time period – year,

PERIOD Reports usually cover a year,
COVERED quarter, month, week, day, etc. Reports
quarter, or month.
may be required as frequently as needed.
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Line vs. Staff Authority

Line- are those directly involved in the daily operations of a business.

Staff- provide assistance and specialized advice and expertise to colleagues in line positions.

CONTROLLER: The Chief Management Accountant

CONTROLLER – the chief management accounting executive of an organization who is mainly
responsible for the accounting aspects of management planning and control

FUNCTIONS OF THE CONTROLLER

1. PLANNING FOR CONTROL – to establish, coordinate, and administer, as an integral part of

management, an adequate plan for the control of operations.
2. REPORTING AND INTERPRETING – to compare performance with operating plans and standards
and to report and interpret results of operations to the concerned users of such reports.
3. EVALUATING AND CONSULTING – to consult with all levels of management responsible for policy
or action concerning any phase of the operation of the business as it relates to the attainment
of objectives and effectiveness of policies, organizational structures, and procedures.
4. TAX ADMINISTRATION – to establish and administer tax policies and procedures.
5. GOVERNMENT REPORTING – to supervise or coordinate the preparation of reports to government
agencies.
6. PROTECTION OF ASSETS – to assure protection for the assets of business through internal control,
internal auditing, and assuring proper insurance coverage.
7. ECONOMIC APPRAISAL – to continuously appraise economic and social forces and government
influences and to interpret their effect upon the business

DISTINCTIONS BETWEEN CONTROLLERSHIP AND TREASURERSHIP

CONTROLLERSHIP TREASURERSHIP
1. Planning and control 1. Provision of capital
2. Reporting and 2. Investor relations
interpreting 3. Short-term financing
3. Evaluating and 4. Banking and custody
consulting 5. Credit and collections
4. Tax administration 6. Investments
5. Government reporting 7. Insurance
6. Protection of assets
7. Economic appraisal
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COSTS AND COST CONCEPTS

Cost – a measurement, in monetary terms, of the amount of resources used for some purpose. When
notified by a term that defines the purpose, cost becomes operational, e.g., selling cost,
acquisition cost, variable cost, etc.

Classifications of costs

As to Function - manufacturing; selling and administrative

As to elements - materials, labor, factory overhead; all examples of selling and administrative
costs.

Alternative Classifications:

Business Function – Research and Development, Design of Products and Processes,

Production, Marketing, Distribution, Customer Service.

Assignment to Cost Object – Direct Cost, Indirect Cost.

Behavior Pattern in Relation to Activity or Volume - Variable, Fixed, Mixed Costs.

Aggregate or Average – Total Cost, Unit Cost

Assets or Expense - Inventoriable Cost or Product Cost, Period Cost

Cost Pool – an account in which a variety of similar costs are accumulated prior to allocation to cost
objects. It is a group of costs associated with an activity. Example: overhead account.

Cost object – the intermediate and final disposition of cost pools.

Example: product, job, process

Cost driver – a factor that causes a change in the cost pool for a particular activity. It is used as a
basis for cost allocation; any factor or activity that has a direct cause-effect relationship

Activity – any event, action, transaction, or work sequence that incurs costs when producing a
product or providing a service.
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COST BEHAVIOR
COST BEHAVIOR – describes how a cost behaves or changes as the amount of cost driver changes.

TYPES OF COSTS AS TO BEHAVIOR:

1. FIXED COST – in total - constant within the relevant range as activity output changes;
per unit - changes as activity level changes

2. VARIABLE COST – in total - varies in direct proportion to changes in activity output;

per unit - remains constant

3. MIXED COST – has both fixed and variable components.

COST BEHAVIOR ASSUMPTIONS:

1. Relevant Range Assumption
Relevant range refers to the band of activity within which the identified cost behavior
patterns are valid. Any level of activity outside this range may have a different cost
behavior pattern.

2. Time Period Assumption

The cost behavior patterns identified are true only over a specified period of time. Beyond
this, the cost may show a different behavior.

CORRELATION ANALYSIS
Correlation – measure of the co-variation between the dependent and independent variables

Coefficient of Correlation (denoted by r) – measure of the extent of the linear relationship between
two variables

Coefficient of Determination (denoted by r2) is computed by squaring the value of r. It represents

the percentage of the total variation in the dependent variable y that is explained or accounted
for by the regression equation.

A very high r2 means that the values in the regression equation explain virtually the entire amount
of the total cost. The variables are highly correlated, i.e., the cost driver selected is highly related
to the dependent cost.

SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS:

1. High-Low Points Method – the fixed and variable elements of the mixed costs are
computed from two data points (periods)—the high and low periods as to
activity level or cost driver.

2. Statistical Scattergraph Method – various costs (the dependent variable) are plotted
on a vertical line (y-axis) and measurement figures (cost drivers or activity
levels) are plotted on a horizontal line (x-axis). A straight line is drawn through
the points and, using this line, the rate of variability and the fixed cost are
computed.

3. Method of Least Squares (Regression Analysis) – mathematically determines a line

of best fit or a linear regression line through a set of plotted points so that the
sum of the squared deviations of each actual plotted point from the point
directly above or below it on the regression line is at minimum.
This method uses the following equations in computing for the values of unit
variable cost and fixed cost:

Equation 1: ∑y = na + b∑x

Equation 2: ∑xy = a∑x + b∑x2

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COST FORMULA: y = a + bx

Where: “y” denotes total cost. It is called the dependent variable because it is dependent on
the value of another variable, the activity level x.
“a” is an estimate of the fixed cost
“b” is an estimate of the variable cost per unit of activity.
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EXERCISES:
1. Consider the descriptors that follow. Determine whether the descriptors are most closely
associated with financial accounting or managerial accounting.

1. Reports are not required and are unregulated.

2. The primary source of data is the organization's basic accounting system, plus various
other sources.
3. Reports are required and must conform to generally accepted accounting principles.
4. Reports are prepared to provide information to managers within the organization.
5. Is involved almost exclusively with past transactions and events.

2. Roles Of Controller and Treasurer Classify the following functions as belonging either to a
controller or a treasurer:

1. Planning and control

2. Creating funding proposals
3. Investor relations
4. Reporting and interpreting
5. Short-term financing

3. Line vs Staff Classify the following functions as belonging either to a line or a staff:

1. Vice-president of finance
2. Plant foreman
3. Human Resources Manager
4. Vice-president of production
5. Sales representative
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4. A company has the following information available regarding costs and revenues for two recent
months. Selling price is ₱20.
April May
Sales revenue ₱60,000 ₱100,000
Less Cost of goods sold 36,000 60,000
Gross profit ₱24,000 ₱ 40,000
Less other expenses:
Advertising ₱ 600 ₱ 600
Utilities 4,200 5,600
Salaries and commissions 3,200 4,000
Supplies (bags, cleaning supplies etc.) 320 400
Depreciation 2,300 2,300
Administrative costs 1,900 1,900
Total 12,520 14,800
Net income ₱11,480 ₱25,200

Required:
a. Identify each of the company’s expenses (including cost of goods sold) as being either
variable, fixed, or mixed.
b. Estimate total cost if sales = ₱75,000.

5. A training firm provides a personalized training program that is popular with many companies.
The number of programs offered over the last five months, and the costs of offering these
programs are as follows:
Programs Offered Costs Incurred
June 55 ₱15,400
July 45 14,050
August 60 18,000
September 50 14,700
October 75 19,000

a. Using the high-low method, compute the variable cost per program and the total fixed cost
per month.
b. Using the least squares regression method, compute the variable cost per program and the
total fixed cost per month.

6. Manila’s Best, a meat company produces one of the best tapa in the National Capital Region.
The company's controller compiled the following information by analyzing the accounting
records:
a. Meat costs the company ₱260 per kilo of tapa produced.
b. Compensation of production employees is ₱90 per kilo of tapa produced.
c. Supervisory salaries total ₱150,000 per month.
d. The company incurs utility costs of ₱50,000 per month plus ₱10 per kilo of tapa
produced.
e. Insurance and property taxes average ₱40,000 per month.

Required:
1. Classify each cost as variable, fixed, or semivariable.
2. Write a formula to express the behavior of the firm's production costs.
(Use the form Y = a + bx, where x denotes the quantity of sausage produced.)

- end
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