Management Accounting
ACCT 481
Michael Dimond
Introduction
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What this class will cover
Why are we here?
Relevance
Who am I?
Who are you?
Schedule
Tools & Resources
Please give me your preferred email address
How do I get an A in this class?
Michael Dimond
School of Business Administration
Doing Assigned Problems
Michael Dimond
School of Business Administration
Managerial accounting is current
• How does Managerial, or Cost Accounting differ from finance
or accounting?
• Accounting looks back to categorize, quantify & report about what happened.
• Finance looks forward to future cash flows, risk and value of what we will
make happen.
• Managerial accounting deals with issues and decisions faced by business
leaders in the present.
• What types of decisions will be made?
• Cost, pricing, productivity, quality, capacity and constraints are all issues
addressed through managerial accounting
• Planning and control are the two primary purposes of managerial accounting.
• Three basic guidelines for managerial accounting:
• Employ a cost-benefit approach.
• Recognize technical and behavioral considerations.
• Apply the notion of “different costs for different purposes.”
Michael Dimond
School of Business Administration
Managerial acounting has a planning process
• Five step decision-making process in planning and control
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Identify the problem and uncertainties.
Obtain information.
Make predictions about the future.
Make decisions by choosing between alternatives.
Implement the decision, evaluate performance, and learn.
Michael Dimond
School of Business Administration
The value chain can be used to optimize performance
• What value does each stage contribute?
Research &
Development
Marketing
Design of
Products &
Processes
Production
Distribution
Customer
Service
Michael Dimond
School of Business Administration
The supply chain can be used to optimize results
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Customer satisfaction
Price point
Timing
Supply chain describes the flow of goods, services, and
information from the initial sources of materials and services
to the delivery of products to consumers, regardless of
whether those activities occur in the same organization or in
other organizations.
Production
Distribution
Michael Dimond
School of Business Administration
Cost management integrates supply and value chains
• Cost management needs to coordinate activities
across all companies in the supply chain as well as
across each business function in an individual
company’s value chain.
• Attempts are made to restructure all cost areas to be
more cost-effective.
Michael Dimond
School of Business Administration
Understanding costs is key to cost management
• A cost object is anything for which a separate measurement of
costs is desired. Examples include a product, a service, a project,
a customer, a brand category, an activity, and a department
• Direct costs of a cost object are related to the particular cost object
and can be traced to that cost object in an economically feasible
(cost-effective) way. Direct costs are traced to a cost object.
• Indirect costs of a cost object are related to the particular cost
object but cannot be traced to that cost object in an economically
feasible (cost-effective) way. Indirect costs are allocated to a cost
object.
• Variable costs changes in total based on the level of activity or
volume.
• Fixed costs remains unchanged in total for a given time period,
despite wide changes in the related level of total activity or volume.
• A cost driver is a factor which causes total costs to change in a
given period (e.g. sales volume). A change in the cost driver results
in a change in the level of total costs.
Michael Dimond
School of Business Administration
Example of assigning costs to cost object
Michael Dimond
School of Business Administration
Different companies have different cost drivers
• Service-sector companies provide services or intangible
products to their customers, for example, legal advice or
audits.
• Merchandising-sector companies purchase and then sell
tangible products without changing their basic form, for
example retailing or distribution.
• Manufacturing-sector companies purchase materials and
components and convert them into various finished goods,
for example automotive and textile companies. Manufacturing
companies tend to have three types of inventory:
• Direct materials inventory
• Work-in-process inventory
• Finished goods inventory
Michael Dimond
School of Business Administration
Costs flow through the organization
Michael Dimond
School of Business Administration
Costs on the income statement have details…
Michael Dimond
School of Business Administration
…which come from multi-step analysis
Michael Dimond
School of Business Administration
Manufacturing costs are analyzed in various ways
Direct
Materials
Cost
Direct
Materials
Cost
Direct
Manufacturing
Labor Cost
Direct
Manufacturing
Labor Cost
Manufacturing
Overhead
Costs
Total Mfg Costs
Direct
Manufacturing
Labor Cost
Manufacturing
Overhead
Costs
Prime Costs
Conversion Costs
• How might an understanding of prime costs help a manager
set a bid price if the company is above break even?
Michael Dimond
School of Business Administration
CVP analysis helps make better decisions
• Cost-volume-profit (CVP) analysis examines the behavior of
total revenues, total costs, and operating income as changes
occur in the units sold, selling price, variable cost per unit, or
fixed costs of a product.
• Breakeven analysis examines the circumstances of a
company making neither a profit nor a loss. This is only part
of the relationship between cost, volume, and profit. Costvolume-profit relationship is a more comprehensive term than
breakeven analysis.
• Breakeven units = Fixed Costs /(Priceunit – Var.Costunit)
• Considerations in CVP Analysis include:
• Changes in the level of revenues and costs caused by changes in the number of
product (or service) units sold.
• Total costs separated into a fixed and variable components.
• The selling price, variable cost per unit, and fixed costs are assumed to be
constant.
• Scenario analysis or sensitivity analysis can be used if differing assumptions are
required.
Michael Dimond
School of Business Administration
Operating leverage is a symptom, not a cause
• Operating leverage describes the effects that fixed costs
have on changes in operating income as changes occur in
units sold
• Knowing the DOL (degree of operating leverage) at a given
level of sales helps managers calculate the effect of
fluctuations in sales on operating incomes.
• Formulas for DOL…
• %Δ Operating Income / %Δ Sales (interval estimate)
• Gross Profit* / Operating Income (point estimate)
• DOL is not time-based, it is condition-based.
• What would DOL be at the breakeven point?
*DOL computations require variable costs to determine gross profit, not direct cost. Our author avoids
confusion by calling gross profit the “contribution margin” when variable costing is used. If GAAP figures are
used, gross profit must have any fixed costs removed and any other variable costs added.
Michael Dimond
School of Business Administration
Break even analysis and DOL help forecast safely
• Adjusting BE for target operating income and net income
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Operating Income = (PxQ) – (VCxQ) – Total Fixed Costs
Operating income = 0 at break even point
BE = Total Fixed Costs / (Punit – VCunit)
What if you target Operating Income = $100,000?
Target volume = (Total Fixed Costs + 100,000) / (Punit – VCunit)
How would you target Net Income?
(HINT: adjust for interest and tax expenses)
• We can also use CVP to explore scenarios, such as cost alternatives.
• Safety margin
• How far from our forecast can we be and still not take a loss?
• Sensitivity of operating income to variance from sales
forecasts
• What does DOL tell us about sensitivity to sales forecasts?
• What if there are multiple products?
Michael Dimond
School of Business Administration
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School of Business Administration
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School of Business Administration
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School of Business Administration
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School of Business Administration
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School of Business Administration
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School of Business Administration
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School of Business Administration
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School of Business Administration
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School of Business Administration
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School of Business Administration