Chapter 1
Managerial Accounting and the Business Environment
Managerial Accounting is concerned with providing information to managers who are
inside an organization.
3 Major Responsibilities for Managers :
1. Planning : Identifying alternatives and select the best one to achieve the organization’s
objective.
Alternatives are expressed formally as budgets in quantitative terms.
2. Directing and Motivation : Oversee day-today activities and keep the organization functioning
smoothly.
3. Controlling : to ensure that the plan is being followed.
* Feedback
show whether operations are on track , it is provided by detailed
report.
* Performance report compare budgets to actual result :
Eg :
Plan
Actual
NI = $ 4 million
$ 5 million Favorable
NI = $ 4 million
$ 3 million Unfavorable why? Correct Action
Financial Account
Managerial Account
 Report to outside users
 Report to those inside organization for
Planning , Directing and Motivating ,
Controlling , Performance evaluation
 Emphasis is on summaries of financial
transactions of past activities
 Emphasis is on decisions affecting the
future
 Objectivity and verifiability of data are
emphasized
 Relevance and flexibility of data are
emphasized
 Precision of information is required
 Timeliness of information is required
 Only summarized data for the entire
organization are prepared
 Detailed segment reports about
departments , products , customers and
so on.
 Must follow International Financial
Reporting Standards (IFRS)
 No need to follow IFRS
 Mandatory for external report
 Not mandatory
5 Major Programs of Managers :
1. Just In Time (JIT)
 Raw materials are purchased and units production are made only as need to meet
actual demand.
 JIT is controlled by “Pull” approach
Ex : Received orders from customers  calculated the amount of raw material
needed purchased
2. Total Quality Management (TQM)
 TQM has 2 characteristics
- Focus on serving customers
- Systematic problem solving using team made up of front line workers
 Problem solving can be done many ways
 Benchmarking – studying order organizations
 Plan – Do – Check – Act (PDCA) approach
3. Process Reengineering
 Focus on simplification
 A business process is diagrammed in details , questions , and then completely
redesigned in order to eliminate the non-value-added-activities
4. Automation
 Replacing human with machines
 It’s expensive but can reduce set up time , greater flexibility , reduction in defects
and get a higher rate of output
5. The theory of constraints
 Constraint is anything that prevents you from getting more of what you want. So
effectively managing constraint is a key to success.
 Try to think how to utilize the constraint resources you have.
Chapter 2 Manufacturing cost
Direct materials: Raw materials that become an integral part of the product and that can be
conveniently traced directly
Direct labor: Those labor costs that can be easily traced to individual units of product.
Manufacturing overhead: Manufacturing cost that cannot be traced directly to specific unit
produced.
Non-manufacturing cost is Selling and administrative costs
Manufacturing costs are often classified as
-Direct material and Direct labor is Prime cost
-Direct labor and Manufacturing overhead is Conversion cost
The income statement: Cost of goods sold for manufacturers differs only slightly from cost of
goods sold for merchandisers.
Schedule of cost of goods manufactured
-Calculate the cost of raw material, direct labor and manufacturing overhead used in
production.
-Calculate the manufacturing costs associated with goods that were finished during the
period.
Overtime: The overtime premiums for all factory workers are usually considered to be part of
manufacturing overhead.
Idle time: The labor costs incurred during idle time are ordinarily treated as manufacturing
overhead.
Labor fringe benefits: Include employer paid costs for insurance programs, retirement plans,
supplemental unemployment programs, social security, Medicare and unemployment taxes.
Chapter 3 : Cost behavior
Cost Behavior : to study the relationship between cost and activity
1. Variable Cost (VC)
Total cost that changes in direct proportion to the activity but cost
per unit (VCU) remains constant
Variable Cost
y
TVC
$
0
units
x
2. Fixed Cost (FC)
- Committed Fixed Cost : cost that cannot be easily or quickly
eliminated ex. maintaining operating facilities
- Discretionary Fixed Cost : costs that can be discontinued at
management's direction ex. advertising
y
Fixed Cost
$200,000
0
TFC
units
x
3. Mixed Cost (MC)
The sum of total variable cost plus total fixed cost.
Methods to separate mixed cost
- Least square
- Regression
- Linear programming
- High - low method
High - Low Method
- VCU =
𝐻𝑖𝑔ℎ𝑒𝑠𝑡 𝑐𝑜𝑠𝑡 − 𝐿𝑜𝑤𝑒𝑠𝑡 𝑐𝑜𝑠𝑡
Highest activity−Lowest activity
- TFC = Total cost - total variable cost
Mixed Cost
y
TVC
MC
$200,000
TFC
0
x
units
4. Step Fixed Cost
Use when there is an intermittent jump in the fixed cost
ex. depreciation - building
Step Fixed Cost
y
c
b
a
0
units
x
5. Step Variable Cost
Step variable cost is when variable cost per unit is constant only at a
particular point.
Step Variable Cost
y
5
$
5
5
0
units
Cost Flow Ledger T account
1. Permanent account which consist of
- Raw materials inventory control account
- Work-in-process inventory control account
- Finished goods inventory control account
x
2. Temporary account which consist of
- Factory payroll control account
- Factory overhead control account
- cost of goods sold account
FOMULAR
1. NI = NET SALES - CGS - OPERATING EXPENSES TAXES
2. CGS = FG. INV. BB + CGM - FG. INV. BB
3. CGM = DM USED + DL + FOH + WIP INV. BB - WIP INV. EB
4. DM USED = RAW MATERAILS USED - IDM
5. RM USED = RM INV. BB + NET PURCHASES - RM INV. EB
6. NET PURCHASES = PURCHASE PRICE + FREIGHT-IN - PRA - PD
7. PURCHASE PRICE = LIST PRICE - TRADE DISCOUNT
Income Statement
ex.
Schedule of Cost of Goods Manufactured
ex.
Chapter 4
Cost volume profit Relationships
Cost volume profit (CVP) analysis is a powerful tool that helps managers
understand the relationships among cost , volume , and profit.CVP analysis focuses on
how profits are affected by the following five factors:
1. Selling price
2. Sales volume
3.Unit variable costs 4. Total fixed costs
5.Mix of products sold
Because CVP analysis helps managers understanding how profits are affected by these
key factors, it is a vital tool in many business decisions. These decisions include what
products and service to offer, what prices to charge, what marketing strategy to use,
and what cost structure to implement.
Contribution Margin
As explained in the previous chapter, contribution margin is the amount remaining
from sales revenue after variable expenses have been deducted. Thus, it is the amount
available to cover fixed expenses and then to provide profits for the period. Notice the
sequence here-contribution margin is used first to cover the fixed expenses, and then
whatever remains goes toward profit. If the contribution margin is not sufficient to
cover the fixed expenses, then a loss occurs for the period.
Computation of the break-even point is discussed in detail later in the chapter; for the
moment, note that the break-even point is the level of sales at which profit is zero
Once break-even point has been reached, net operating income will increase by the
amount of unit contribution margin for each addition unit sold.
CVP Relationship in Equation Form
The contribution format income statement can be expressed in equation form as
follows:
Profit = (Sales – Variable expenses) – Fixed expenses
For brevity, we use the term profit to stand for net operating income in equations.
When a company has only a single product, as at Acoustic Concepts, we can further
refine the equation as follows:
Sales = Selling price per unit X Quantity sold = P X Q
Variable expenses = Variable expenses per unit X Quantity sold = VXQ
Profit = (P X Q – V X Q) – Fixed expenses
It is often use full to express the simple profit equation in terms of the unit
contribution margin (Unit CM) as follows:
Unit CM = Selling price per unot – Variable expenses per unit = P - V
Profit = (P X Q – V X Q) – Fixed expenses
Profit = (P - V) X Q – Fixed expenses
Profit = Unit CM X Q – Fixed expenses
Contribution Margin Ratio (CM Ratio)
In the previous section, we explored how cost-volume-profit relationships can be
visualized. In this section, we show how the contribution margin ratio can be used in
cost-volume-profit calculation. As the first step, we have added a column to Acoustic
Concepts’ contribution format income statement in which sales revenue, variable
expenses, and contribution margin are expressed as a percentage of sales
The contribution margin as a percentage of sales is referred to as the contribution
margin ratio (CM ratio). This ratio is computed as follows:
CM ration = Contribution margin / Sales
The relation between profit and the CM ratio can also be expressed using the
following equation:
Profit = CM ratio X Sales – Fixed expenses
Break-Even Analysis
Earlier in the chapter we defined the break-even point as the level of sales at which the
company’s profit is zero. What we call break-even analysis is really just a special cause
of target profit analysis in which the target profit is zero. We can use either the
equation method or the formula method or the formula method to solve for the
break-even point, but for brevity we will illustrate. The only difference is that the
target profit is zero in break-even analysis.
Breakeven in Unit Sales In a single-product situation, recall that the formula for the
unit sales to attain a specific target profit is:
Unit sales to attain the target profit = (Target profit + Fixed expenses) / Unit CM
To compute the unit sales to break even, all we have to do is to set the target profit to
zero in the above equation as follows:
Unit sales to break even = (0+Fixed expenses) / Unit CM
Unit sales to break even = Fixed expenses / Unit CM
Linking Margin Margin of safety Percentage with Break-Even Percentage
Break-even percentage (percentage of sales) through its relationship with the margin of
safety percentage is handy and useful, especially when we apply it in multiproduct breakeven analysis in a later section. To prove the relationship, we can define margin of safety
percentage in the following:
Margin of safety percentage (MoS%) = Margin of safety in dollars / Total sales in dollar
= (Total sales in dollar – Breakeven in dollars) / Total sales in dollars
= 1 – (Breakeven in dollar/Total sales in dollars)
= 1 – Break-even percentage
= 1 – BE%
Operating Leverage
A level is a tool for multiplying force. Using a lever, a massive object can be moved with
only a modest amount of force. In business, operating leverage serves a similar purpose.
Operating leverage is a measure of how sensitive net operating income is to a given
percentage change in dollar sales. Operating leverage acts as a multiplier. If operating
leverage is high, a small percentage increase in sales can produce a much larger
percentage increase in net operating income
The degree of operating leverage at a given level of sales is computed by the following
formular:
Degree of operating leverage = Contribution margin / Net operating income
Chapter 11 Flexible budgets and performance analysis
Flexible budget and variance analysis are generic approaches used by many
organizations regardless of the costing systems they employ. Many companies will compare
their actual results directly with the master and/or rolling budgets.


Characteristics of a flexible budget
1. Planning budget is prepared before the period begins and is valid for only the
planned level of activity.
2. Flexible budget is an estimate of what revenues and costs should have been,
given the actual level of activity for the period.
Deficiencies of the static planning budget
Rick has identified eight major categories of costs – wages and salaries, hairstyling,
supplies, client gratuities, electricity, rent, liability insurance, employee health
insurance, and miscellaneous. Client gratuities consist of flowers, candies, and
glasses of champagne that Rick gives to his customers while they are in the salon.
Rick’s Hairstyle
Planning Budget
For the month ended March 31
Budgeted client-visits (q)
1000
Revenue ($180.00q)
$180000
Expenses:
Wages and salaries ($65000+$37.00q)
102000
Hairstyling supplies ($1.50q)
Client gratuities ($4.10q)
Electricity ($1500+$0.10q)
Rent ($28500)
Liability insurance ($2800)
Employee health insurance ($21300)
Miscellaneous ($1200+$0.20q)
Total expense
Net operating income
1500
4100
1600
28500
2800
21300
1400
163200
$16800
Rick’s Hairstyle
Income Statement
For the month ended March 31
Actual client-visits
Revenue
Expenses:
Wages and salaries
Hairstyling supplies
Client gratuities
Electricity
Rent
Liability insurance
Employee health insurance
Miscellaneous
Total expense
Net operating income





1100
$194200
106900
1620
6870
1550
28500
2800
22600
2130
172970
$21230
We have considered so far A flexible budget approach recognizes that a budget can be adjusted to show what
costs should be for the actual level of activity. Preparing the report is
straightforward. The cost formula for each cost is used to estimate what the cost
should have been for 1100 client-visits—the actual level of activity for March.
Activity Variances
Part of the discrepancy between the budgeted profit and the actual profit is due to
the fact that the actual level of activity in March was higher than expected.
Therefore, the differences between the planning budget and the flexible budget
show what should have happened solely because the actual level of activity differed
from what had been expected.
Revenue and spending variances
In the last section we answered the question “What impact did the change in activity
have on our revenues, costs, and profit?” In this section we will answer the question
“How well did we control our revenues, our costs, and our profit?”
Performance reports in nonprofit organization
The performance reports in nonprofit organizations are basically the same as the
performance reports we have considered so far – with one prominent difference.
Nonprofit organizations usually receive a significant amount of funding from sources
other than sales.
Performance reports in cost centers
Performance reports are often prepared for organizations that do not have any
source of outside revenue. In particular, in large organization a performance report
may be prepared for each department- including departments that do not sell

anything to outsides. Because the managers in these departments are responsible
for costs, but not revenues, they are often called cost centers.
Flexible budgets with multiple cost drivers
Rick’s Hairstyle
Flexible budget
For the month ended March 31
Actual client-visits (q1)
Actual hours of operation (q2)
Revenue (180.00q1)
Expenses:
Wages and salaries ($65000+$220q2)
Hairstyling supplies ($1.50q1)
Client gratuities ($4.10q1)
Electricity($390+$0.10q1+$6.00q2)
Rent ($28500)
Liability insurance ($2800)
Employee health insurance ($21300)
Miscellaneous ($1200+0.20q1)
Total expense
Net operating income
1100
185
$198000
105700
1650
4510
1610
28500
2800
21300
1420
167490
$30510
Chapter 11 Standard costs and operating performance measures
Performance measurement can be helpful in an organization. It can
provide feedback concerning what works and what does not work, and it can
help motivate people to sustain their efforts.
 Standard costs – Management by exception
Standard are widely used in managerial accounting where they relate to
the quantity and cost of inputs used in manufacturing goods or providing
services. Quantity and price standards are set for each major input such
as raw materials and labor time. Quantity standards specify how much
of an input should be used to make a product or provide a service. Price
standards specify how much should be paid for each unit of the input.
Actual quantities and actual costs of inputs are compared to these
standards. This process is called management by exception.
 Setting Standard costs
Setting price and quantity standards ideally combined the expertise of
everyone who has responsibility for purchasing and using inputs.
However, the standards should be designed to encourage efficient
future operation, not just a repetition of past operation that may or may
not have been efficient.
 Setting direct materials standards
The standard price per unit for direct materials should reflect the final,
delivered cost of the materials, net of any discounts taken.
Purchase price, top-grade pewter ingots, in 40-pound ingots $3.85
Freight, by truck, from the supplier’s warehouse
0.24
Less purchase discount
(0.09)
Standard price per pound
$4.00
 Setting direct labor standards
Direct labor price and quantity standards are usually expressed in terms
of a labor rate and labor-hours.
Basic wage rate per hour
Employment taxes at 10% of the basic rate
Fringe benefits at 30% of the basic rate
Standard rate per direct labor-hour
$10.00
1.00
3.00
$14.00
 Price and quantity variances
A price variance is the difference between the actual price of an input
and its standard price, multiplied by the actual amount of the input
purchased. A quantity variance is the difference between how much of
an input was actually used and how much should have been used and is
stated in dollar terms using the standard price of the input.
 Materials price variance—A closer look
A material price variance measures the difference between what is paid
for a given quantity of materials and what should have been paid
according to the standard.
Materials price variance = (AQ x AP) – (AQ x SP)
 Advantages of standard costs
1. Standard costs are a key element in a management by exception
approach. If costs conform to standards, managers can focus on
other issues. When costs are significantly outside the standards,
managers are alerted that problems may exist that require attention.
This approach helps managers focus on important issues.
2. Standards that are viewed as reasonable by employees can promote
economy and efficiency. They provide benchmarks that individuals
can use to judge their own performance.
3. Standard costs can greatly simplify bookkeeping. Instead of recording
actual costs for each job, the standard costs for direct materials,
direct labor, and overhead can be charged to jobs.
4. Standard costs fit naturally in an integrated system of “responsibility
accounting.” The standard establish what costs should be, who
should be responsible for them, and whether actual costs are under
control.