Introduction to

Managerial Accounting
MCP1 – Session 1
Prof. John B. Balce

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The Changing Role of Managerial
Accounting in a Dynamic Business
Environment
CHAPTER 1

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Why Study Managerial Accounting
In today’s data-driven world, managers cannot ignore the need to gather and
interpret data to generate competitive advantages and sustainable profits.

Data Information Insights Intelligence Decisions Money

INFORMATION GOALS

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Managerial Accounting

 Managerial Accounting
 the process of identifying, measuring, analyzing, interpreting, and communicating
information in pursuit of an organization’s goals.
 Managerial Accountants
 Specialists in using the tools of managerial accounting to help the organization and
its managers run the operation effectively.
PAST PRESENT

Place in Organization Support Departments Embedded in Operating

Departments
Role Number cruncher and Business partner and trusted
financial historian advisor

 All managers use the tools of managerial accounting. This is not just the
domain of accountants.
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 Management Processes
Choosing among available
Decision Making alternatives

Ensuring that the

organization
operates in the
intended manner and
achieves its goals Acquires Hires
RESOURCES PEOPLE

Controlling Planning
GOALS

Engages in Developing detailed financial

ACTIVITIES and operational description of
anticipated operations.

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Running the organization on a Directing Operational
day-to-day basis Activities
Role of Managerial Accounting

1. Provides information for decision making and planning

2. Assists managers in directing and controlling operational activities
 Managerial accounting information has attention-directing function
3. Motivates managers and other employees toward the organization’s goals
 Alignment of organizational and personal goals through budgets
4. Measures the performance of activities, subunits, managers and other
employees within the organization
5. Assesses the organization’s competitive position, and works with other
managers to ensure the organization’s long-run competitiveness in the
industry

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Managerial vs. Financial Accounting
MANAGEMENT MANAGERIAL ACCOUNTING
INFORMATION SYSTEM Information for decision Internal Users of
making, planning, directing
Information
and controlling an
organization’s operations, and
(Managers at all levels
ACCOUNTING SYSTEM in the organization)
assessing its competitive
(Accumulates data for position)
use in both financial
and managerial
accounting)
External Users of
COST Information
FINANCIAL ACCOUNTING (Stockholders, financial
ACCOUNTING Published financial
SYSTEM analysts, lenders,
statements and other
(Accumulates cost financial reports unions, consumer
information) groups, and government
agencies)
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Managerial Accounting and the Value Chain

 Value Chain → set of linked, value-

creating activities from sourcing
raw materials up to the delivery of
goods and services to customers
 Customers must “value” and be
willing to pay for each activity in
the value chain plus a margin for a
company to be successful.
 Sustainable competitive advantage
results from:
 Performing one or more activities
at same quality but lower cost; or
 Performing value chain activities at
higher quality but no greater cost
Source: https://www.smartsheet.com/everything-you-need-to-
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know-about-value-chain-analysis
Capacity and Capacity Costs

 Capacity
 the upper limit on the amount of goods or services an organization can produce in
a specified period of time
 Each activity in the value chain brings capacity challenges; increasing capacity
entails cost → capacity dilemma
 Concepts of Capacity
 Theoretical capacity
 Upper limit on production of goods or services if everything works perfectly

 Practical capacity
 Measure of capacity which allows for normal occurrences such as downtime, illness, etc.

 Used vs. Unused Capacity

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Cost Management System

 Management planning and control system with the following objectives:

 Measure the cost of resources consumed, including unused capacity
 Identify and eliminate non-value-added costs (i.e. activities that can be
eliminated with no deterioration of product quality, performance, or perceived
value.)
 Determine the efficiency and effectiveness of all major activities performed
 Identify and evaluate new activities that can improve future performance
 The focus on “activities,” led managerial accountants to develop activity
accounting, activity based costing (ABC) and activity based management
(ABM).

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Basic Cost Management Concepts
CHAPTER 2

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Product Costs, Period Costs and
Expenses
 Expense
 Cost incurred when an asset is used up or sold for the purpose of generating revenue
 Product Costs
 Cost assigned to goods that were either purchased or manufactured for sale
 Upon sale, the product cost is expensed as “Cost of Goods Sold.”
 Retailer or Wholesaler: Purchase cost of inventory plus any shipping charges
 Manufacturer: all costs incurred in manufacturing the inventory (materials, labor and
overhead)
 Also called Inventoriable cost
 Period Costs
 Costs that are not product costs
 Recognized as expenses during the period in which they are incurred.

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Financial Statements

 Income Statement  Balance Sheet

 Cost of goods sold  Inventory
 Operating Expenses  Merchandise Inventory

 R&D Costs  Goods purchased for resale

 Selling Expenses  Raw Material Inventory

 Materials before they are placed into
 Administrative Expenses
production

 Work-in-Process Inventory
 Partially-completed products as of
the balance sheet date

 Finished Goods Inventory

 Manufactured goods ready for sale

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Types of Production Processes

Type Description Examples

Job Shop • Low production volume • Film studios
• Little standardization • Works of art
• One-of-a-kind products
Batch • Multiple products • Production of heavy
• Low volume equipment
Assembly • A few major products • Automobiles
• Higher volume
Continuous Flow • High production • Gasoline
volume • Canned goods
• Highly standardized • Snacks
commodity products
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 Costs in Assembly Manufacturing

Cost Description
PRIME COSTS

Direct material cost Raw material consumed in the manufacturing process that is
physically incorporated into the finished product and can be
traced to the products easily
Direct labor cost Cost of salaries, wages and fringe benefits of personnel who work
directly on the manufactured products
Manufacturing All other costs of manufacturing:
overhead 1. Indirect material
CONVERSION

• Materials that are not an integral part of the product, or,

COSTS

if an integral part, are insignificant.

2. Indirect labor
• Personnel costs that do not work directly on the product
3. Other manufacturing costs
• Depreciation, property taxes, insurance, utilities, costs of
operating service departments, overtime premiums, and
cost of idle time. 15
Flow of Manufacturing Costs

Direct Material

Work-in-Process Finished Goods Cost of Goods

Direct Labor
Inventory Inventory Sold

Manufacturing
Overhead

Product costs… …are stored in inventory… …until the products are sold.

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Schedule of Cost of Goods Manufactured
COMET COMPUTER CORPORATION
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 20x2 (in thousands)

Direct Material
Raw material inventory, January 1 $ 6,000
Add: Purchases of raw material 134,000
Raw material available for use $ 140,000
Deduct: Raw material inventory, December 31 (5,020)
Raw material used $ 134,980

Direct labor 50,000

Manufacturing Overhead
Indirect Material $ 10,000
Indirect Labor 40,000
Depreciation on factory 90,000
Depreciation on equipment 70,000
Utilities 15,000
Insurance 5,000
Total manufacturing overhead 230,000

Total manufacturing costs $ 414,980

Add: Work-in-process inventory, January 1 120
Subtotal $ 415,100
Deduct: Work-in-process inventory, December 31 (100) 17
Cost of goods manufactured $ 415,000
Schedule of Cost of Goods Sold

COMET COMPUTER CORPORATION

Schedule of Cost of Goods Sold
For the Year Ended December 31, 20x2 (in thousands)

Finished goods inventory, January 1 $ 200

Add: Cost of Goods Manufactured 415,000
Cost of Goods Available for Sale $ 415,200
Deduct: Finished goods inventory, December 31 (190)
Cost of Goods Sold $ 415,010

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Basic Cost Management Concepts

 Activity
 refers to a measure of the organizations output of products or services
 Cost driver
 A characteristic of an activity or event that causes costs to be incurred by that
activity or event
 The higher the correlation between the cost and the cost driver, the more accurate
the understanding of cost behavior
 Cost-benefit tradeoff: the higher the number of cost drivers, the higher the
accuracy but cost of information will increase.

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Basic Cost Management Concepts

 Two types of cost behaviors:

 Variable Costs → As activity changes, total variable cost increases or decreases
proportionately with the activity change, but unit variable cost remains the same
 Fixed Costs → As the level of activity increase, total fixed cost remains the
constant but unit fixed cost declines

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Responsibility Accounting

 To manage and control costs, these must be traced to departments or work

centers in which the cost was incurred
 Cost object
 An entity (e.g. product, service, or department) to which a cost is assigned.
 Direct cost → cost that can be directly traced to the cost object
 Indirect cost → cost that is not directly traceable to the cost object
 Activity accounting → the process of tracing costs; vital to eliminating non-
value-added costs without deterioration of product or service quality

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Responsibility Accounting

 Types of Costs based on Controllability

 Controllable Costs → costs that a manager can control or heavily influence
 Uncontrollable Costs → costs that a manager cannot influence significantly
 Example: Production quantity is controlled by the production supervisor but the
cost of raw materials is under the control of the purchasing manager

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Economic Cost Concepts

 These concepts are helpful in helping managerial accountants decide what

cost information is relevant to the decisions faced by the organization’s
managers.
 Opportunity Cost
 The benefit that is sacrificed when the choice of one action precludes taking an
alternative course of action.
 In making decisions, managers should consider both the out-of-pocket costs of the
chosen alternative and opportunity costs related to the foregone alternative
 Useful in deciding whether to outsource an activity or not
 Sunk Cost
 Costs that have been incurred in the past, hence do not affect future costs and
cannot be changed by any current or future actions

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Economic Cost Concepts

 Differential Cost
 The amount by which the cost differs under two alternative actions
 The increase in cost from one alternative to another is called “incremental cost”
 Marginal Cost
 The extra cost incurred when one additional unit is produced.
 Average Cost
 Total cost, for whatever quantity is manufactured, divided by the number of units
manufactured.

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Costs and Benefits of Information

 Communication of cost information should be EFFECTIVE.

 Accountants should weigh the benefit of providing information against:
 Cost of generating, communicating and using the information
 Information overload

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Class Exercises

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How can Management Accounting
help achieve the SDGs?

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Managerial Accounting and the
Sustainable Development Goals
 Businesses nowadays are being
challenged to show how they
can help achieve the
Sustainable Development
Goals as prescribed by the
United Nations.
 Managerial accounting, given
its influence in strategy-
setting, execution and control,
can assist organizations in
making this happen.

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Managerial Accounting and the
Sustainable Development Goals
SDG Goal How Managerial Accounting Can Support
No.
4. Quality Education • Increasing financial literacy.
• Affordable and comprehensive education is • Expanding accountancy education to boost the
critical in ending poverty and enabling profession’s talent pool.
economic development. • Providing continuing education to focus
professionals on sustainable outcomes.

5. Gender Equality • Championing equal access to education.

• Women make up more than 70% of the • Supporting a diverse talent pool.
world’s poor. Ensuring their full and effective • Encouraging diversity at board level.
participation in business activities and
providing equal opportunities for leadership
and decision-making can empower women
and eradicate poverty.
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Source: https://www.fm-magazine.com/news/2017/jan/sustainable-development-goals.html
Managerial Accounting and the
Sustainable Development Goals
SDG Goal How Managerial Accounting Can Contribute
No.
8. Decent work and economic growth • Furthering the adoption of globally accepted
• The promotion of sustained, inclusive standards for reporting.
economic growth that can bring job • Promoting ethical investment.
creation, productive employment and decent • Ensuring that businesses aspire and adhere to the
work for all underpins many of the SDGs. SDGs.

9. Industry, innovation and infrastructure
• Building resilient infrastructure and
promoting innovation and sustainable
industrialisation can meet climate change
goals and increase prosperity.
• Making the case for long-term value creation over
short-term profit.
• Encouraging investment in disruptive technology
and infrastructure.
• Ensuring sound financial planning and risk
management.

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Source: https://www.fm-magazine.com/news/2017/jan/sustainable-development-goals.html
Managerial Accounting and the
Sustainable Development Goals
SDG Goal How Managerial Accounting Can Contribute
No.
12 Responsible consumption and production • Encouraging integrated reporting that considers
• Encouraging sustainable consumption stakeholder value, as well as shareholder value.
and production patterns to ensure long- • Reducing risk through proper corporate governance.
term prosperity. • Supporting the development of products, services and
process that contribute to the SDGs.

13 Climate action • Framing ecological opportunities and risks in a

• Governments and organisations must be commercial context.
held to account to combat climate • Encouraging investment in cleaner and greener
change and avoid ecological and business methods.
environmental disaster. • Aligning corporate reporting to equate natural capital
with financial capital services and processes that
contribute to SDGs.
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Source: https://www.fm-magazine.com/news/2017/jan/sustainable-development-goals.html
Managerial Accounting and the
Sustainable Development Goals
SDG Goal How Managerial Accounting Can Contribute
No.
16 Peace, justice and strong institutions • Advocating good governance.
• In order for markets to function properly and • Encouraging a globally accepted integrated
lift people out of poverty, they must have reporting framework.
transparent financial institutions and • Always holding institutions to account.
accountable justice systems to provide a
level playing field and opportunity for all.

17 Partnerships for the goals
• Strengthening the collaborative relationships
between businesses, governments and
individuals is the only way for the SDGs to
succeed.
• Encouraging partnerships across the value chain.
• Fostering an understanding that joined-up
approaches benefit all parties.
• Highlighting the cost/ opportunity benefit in
reports.

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Source: https://www.fm-magazine.com/news/2017/jan/sustainable-development-goals.html