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INTRODUCTION TO MANAGEMENT ACCOUNTING
MANAGEMENT ACCOUNTING (also called Managerial Accounting or Internal Accounting) - a field of
accounting that provides economic and financial information for internal users, particularly the managers or
decision-makers in an organization.
Management Functions:
Planning
Directing; and
Controlling
MANAGEMENT ACCOUNTING vs. FINANCIAL ACCOUNTING
MANAGEMENT
ACCOUNTING
FINANCIAL ACCOUNTING
USERS OF REPORT
Internal users: officers
and managers
External users:
Stockholders; creditors,
concerned government agencies
PURPOSE
To provide internal users with in
format on that may be used by
managers in carrying out the
functions of planning,
controlling, decision making,
and performance evaluation.
To provide external users with information
about the organization's financial position and
results of operations.
TYPES OF REPORTS
Different types of reports,
such as budgets, financial
projections, cost analysis,
etc., depending on the specific
needs of management.
Primarily financial statements and the
accompanying notes to such statements.
BASIS OF
REPORTS
Reports are based on a
combination of historical,
estimated, and projected data.
Reports are based almost exclusively on
historical data.
STANDARDS
OF
PRESENTATION
In preparing reports, the
management of a
company can set rules to
produce information
most relevant to its
specific needs
Reports are prepared in accordance with
generally accepted accounting principles and
other pronouncements of authoritative
accounting bodies.
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STANDARDS OF ETHICAL CONDUCT FOR MANAGEMENT ACCOUNTANTS
a. COMPETENCE
b. CONFIDENTIALITY
c. INTEGRITY
d. CREDIBILITY
Head of Accounting Office: The Chief 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
PLANNING FOR CONTROL
REPORTING AND INTERPRETING
EVALUATING AND CONSULTING
TAX ADMINISTRATION
GOVERNMENT REPORTING
PROTECTION OF ASSETS
MANAGEMENT
ACCOUNTING
FINANCIAL ACCOUNTING
REPORTING
ACTIVITY
Focus of reports is on
the company's value
chain, such as a
business segment,
product- line,
supplier, or customer.
Financial reports relate to the business as a whole
PERIOD
COVERED
Reports may cover
any time period –
year, quarter, month,
week, day, etc.
Reports may be
required as frequently
as needed.
Reports usually cover a year, quarter, or month.
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COST CONCEPTS
Manufacturing Costs:
Direct Materials
Direct Labor
Manufacturing Overhead
COST TERMS:
Cost - monetary amount of resources given up or sacrifice to attain an objective such as acquiring goods and
services.
Cost behavior - describes how a costs behaves or changes the amount of cost driver changes.
Cost pool - an account in which a variety of similar costs are accumulated prior to allocation of cost object.
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 in a particular activity.
Activity - any event, transaction or work sequence that incurs cost when producing a product or providing a
service.
Cost Behavior Analysis - study of how specific costs respond to changes in the level of business activity.
SUMMARY:
Costs Total Amount Per Unit
Fixed Constant Decreases as production increases
(inverse)
Variable Increases as production increases (direct) Constant
Mixed Increases less proportionately
(vs. total variable costs) as production increases
Decreases less proportionately
(vs. unit fixed costs) as
production increases
SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS:
A. High-low Method
B. Scatter-graph Method
C. Least Square (Regression Analysis) Method
Correlation Analysis
Used to measure the strength of linear relationship between two or more variables
The correlation between two variables can be seen by drawing a scatter diagram:
If the points seem to be straight line, there is a high correlation.
If a points forms a random pattern, there is a low correlation or no correlation at al l
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Coefficient of Correlation (r)
- Measures the relative strength of linear relationship between two variables. Its values ranges from - 1 to
If r=- 1 , there is a perfect inverse linear relationship between x and y.
If r= 0 , no linear relationship.
If r=+ 1 , there is a perfect direct relationship between x and y.
Coefficient of Determination
- It is a measure of goodness of fit in the regression
SAMPLE PROBLEM:
Data about Magicsarap Company's production and inventories for the month of July are as follows:
Purchases - direct materials P 143 , 440
Freight in 5 , 000
Purchase returns and allowances P 2 , 440
Direct labor 175 , 000
Actual factory overhead 120 , 000
Inventories: July 1 July 31
Finished goods P 68 , 000 P 56 , 000
Work in process 110 , 000 135 , 000
Direct materials 52 , 000 44 , 000
Magicsarap Company applies factory overhead to production at 80 % of direct labor cost. Over- or underapplied
overhead is closed to cost of goods sold at year-end. The company's accounting period is on the calendar year
basis.
a. Magicsarap Company's prime cost for July was
b. Magicsarap Company's conversion cost for July was
c. For the month of July, Magicsarap Company's total manufacturing cost was
d. For July, Magicsarap Company's cost of goods transferred to finished goods inventory account was
e. Magicsarap Company's cost of goods sold for July was
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Sum of the costs (y) P 5 , 600
Sum of the kilos multiplied by the costs (Exy) P 545 , 600
Sum of the kilos squared (x 2 ) 56 , 000
a. Using the least squares method, the average rate of variability per kilo of materials used is
b. Using the least squares method, the fixed portion of the cost is
c. The projected cost of operations for 90 kilos of materials is
COST-VOLUME-PROFIT ANALYSIS
- Study of the effects of changes in the costs and volume on a company’s profits.
ASSUMPTIONS:
The behavior of both costs and revenues is linear throughout the relevant range of the
activity index.
Costs can be classified accurately as either variable or fixed
Changes in activity are the only factors that affect costs.
All units produced are sold.
When more than one product is sold, the sales mix will remain constant (the percentage that
each product represents of total sales will stay the same).
Contribution Margin- amount of revenue remaining after deducting variable costs. It can be expressed as
per unit or per ratio.
Margin of safety- the difference between actual sales and break-even sales.
Sales Mix- is the relative proportion in which each product is sold when a company sells more than one
product.
Degree of operating leverage-provides a measure of a company’s earnings volatility and can be used to
compare companies.
SUMMARY OF FORMULAS:
Contribution Margin (CM)
CM ratio: Contribution Margin or Unit Contribution Margin
Sales Unit Selling Price
Break-even Point (BEP)-single product BEP units =
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Fixed Costs
Contribution Margin per unit
Unit Sales with Target Profit
Fixed Costs + Profit
Contribution Margin per unit
NOTE: PROFIT MUST BE
EXPRESSED BEFORE TAX
BEP in Peso Sales =
Fixed Costs
Contribution Margin Ratio
Peso Sale with Target Return on
Sales
Fixed Costs
CM Ratio-Return on Sales
BEP-multiple products (sales mix)
BEP units =
Fixed Costs
Weighted Ave. CM per unit
BEP in Peso Sales =
Fixed Costs
Weighted Ave. per Ratio
Degree of Operating Leverage:
Contribution Margin
Profit before Tax
Margin of Safety= Sales-Breakeven Sales
Margin of Safety Ratio:
Margin of Safety
Sales
SAMPLE PROBLEMS:
Watsons Corp. produces and sells a single product. The selling price is P 25 and the variable costs is P 15
per unit. The corporation's fixed costs is P 100 , 000 per month. Average monthly sales is 11 , 000 units.
a. The corporation's contribution margin per unit and as a percent of sales (CMR) is
b. The corporation's break-even point
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NOTE:
Selling and Administrative expenses are period costs under both variable and fixed costing
Companies that use cost-volume-profit format in preparing a variable costing income statement.
PRODUCTION>SALES AC>VC
PRODUCTION<SALES AC<VC
PRODUCTION=SALES AC=VC
RECONCILIATION OF INCOME:
Income = Inventory x unit FFOH
Inventory= Units Produced-Units Sold
SAMPLE PROBLEMS:
During January 2022 ; Dedmatology Inc produced 1 , 000 units of Product A with costs as follows:
Materials
Labor
Variable factory overhead
Fixed factory overhead
Total manufacturing costs
Selling and administrative costs incurred during the month were:
Variable selling and administrative P 3 , 000
Fixed selling and administrative 2 , 000
Total 5 , 000
Selling price per unit P 20. 00
Dedmatology, Inc. uses the JIT system. It does not keep inventories
a. What amount should be considered product cost per unit for external reporting purposes?
b. What is the product cost per unit under variable costing?
c. What is the variable cost per unit for purposes of computing the contribution margin?
P 6 , 000
3 , 300
2 , 500
1 , 500
P 13 , 300
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d. Under absorption costing, income for January 2022 was
TWERKITLIKEDAVE Corporation produces and sells a single product. In 2015 , its first year of
operation, planned and actual production was 80 , 000 units. It sold 75 , 000 of these units for P 30 per unit.
Planned and actual costs in 2015 were as follows:
Manufacturing Non-manufacturing
Variable P 480 , 000 P 400 , 000
Fixed 320 , 000 240 , 000
a. Using absorption costing, the company's operating income in 2015 would be
b. Using variable costing, the company's operating income in 2015 would be
STANDARD COSTING
- A system that determines a product cost by using standards or norms for quantities and/or prices of
component elements.
Standard Cost-a planned unit cost of the product, component or service produced in a period.
The need for standards:
STANDARD
- is a measure of acceptable performance established by the management as a guide in making
economic decisions
- Benchmark or norm for measuring performance.
- A determined unit cost in which is used as a measure of performance.
- Budgeted cost per unit of a product.
A standard is a unit amount.
A budget is a total amount.
FORMULA OF STANDARD COST: QUANTITY STANDARD X PRICE STANDARD
Setting Standard Costs:
Two levels:
- Ideal Standards- represent optimum levels of performance under perfect operating conditions.
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C. EFFICIENCY VARIANCE
SAMPLE PROBLEMS:
During July, a company's direct materials costs for the production of Product U were as follows:
Standard unit price P 12. 50
Standard quantity allowed for
actual production
units
Actual unit purchase price P 13
Quantity purchased and used
for actual production 6 , 900 units
a. The total materials cost variance is
b. The materials efficiency or usage variance is
c. The materials spending variance or price variance is
Kavogue Company produced 3 , 200 units of product. Each unit requires 2 standard hours. The standard
labor rate is P 15 per hour. Actual direct labor for the period was P 79 , 200 ( 6 , 600 hours x P 12 ).
a. What is the direct labor time variance?
b. What is the direct labor rate variance?
Guo Corporation's standard cost system contains the following overhead costs, computed based on a
monthly normal volume of 25 , 000 units or 50 , 000 direct labor hours:
Variable factory overhead P 12 per unit
Fixed factory overhead _ 8 per unit
Total P 20
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The following information pertains to the month of April 2024 :
Actual FOH costs incurred:
Variable P 316 , 680
Fixed 225 , 000
Actual production 26 , 000 units
Actual direct labor hours worked 54 , 600 hours
a. The total FOH cost variance is
b. The variable overhead variance amounts to
c. The variable overhead spending variance is
d. The variable overhead efficiency variance is
e. The fixed overhead variance amounts to
f. The fixed overhead budget or spending variance amounts to.
g. The fixed overhead volume or capacity variance amounts to
h. Using the two-variance method, the controllable variance is
i. Using the three-variance method for analyzing FOH variance, the budget or spending variance
amounts to
j. Under the three-variance method for FOH analysis, the efficiency variance is
WORKING CAPITAL MANAGEMENT
WORKING CAPITAL
For accountants, working capital equals current assets minus current liabilities.
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CASH MANAGEMENT – involves the maintenance of the appropriate level of cash and investment in
marketable securities to meet the firm’s cash requirements and to maximize income on idle funds.
REASONS FOR HOLDING CASH
- TRANSACTION PURPOSES – firms maintain cash balances that they can use to conduct the
ordinary business transactions; cash balances are needed to meet cash outflow requirements
for operational or financial obligations.
- COMPENSATING BALANCE REQUIREMENTS – a certain amount of cash that a firm must
leave in its checking account at all times as part of a loan agreement. These balances give banks
additional compensation because they can be relent or used to satisfy
reserve requirements.
- PRECAUTIONARY RESERVES - firms hold cash balance in order to handle unexpected
problems or contingencies due to the uncertain pattern of cash inflows and outflows.
- POTENTIAL INVESTMENT OPPORTUNITIES - excess cash reserves are allowed to build up in
anticipation of a future investment opportunity such as a major capital expenditure project.
- SPECULATION - firms delay purchases and store up cash for use later to take advantage of
possible changes in prices of materials, equipment, and securities, as well as changes in currency
exchange rates.
THE CONCEPT OF FLOAT IN CASH MANAGEMENT
FLOAT - difference between the bank balance for a firm’s account and the balance that the firm
shows on its own books
TWO ASPECTS OF FLOAT
the time it takes a company to process its checks internally
the time consumed in clearing the check through the banking system
TYPES OF FLOAT
- NEGATIVE FLOAT – book balance exceeds the bank balance, which means that there is
more cash tied up in the collection cycle and it earns a 0 % rate of return.
Mail Float - peso amount of customer’ s payments that have been mailed by a customer but not yet
received by the seller
Processing Float - peso amount of customer’ s payments that have been received by the seller but not
yet deposited
Clearing Float - peso amount of customer’ s checks that have been deposited but not yet cleared
- Good cash management dictates that above floats must be minimized, if not eliminated.
- POSITIVE FLOAT (DISBURSEMENT FLOAT) - the firm’s bank balance exceeds its book
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balance [example: checks written/issued by the firm that have not yet cleared].
Management should increase this type of float.
CASH MANAGEMENT STRATEGIES
1. ACCELERATE CASH COLLECTIONS
2. CONTROL (SLOW DOWN) DISBURSEMENTS
3. REDUCE THE NEED FOR PRECAUTIONARY CASH BALANCE
BAUMOL CASH MANAGEMENT MODEL - an EOQ-type model which can be used to
determine the optimal cash balance where the costs of maintaining and obtaining cash
are at the minimum.
MANAGEMENT OF MARKETABLE SECURITIES
MARKETABLE SECURITIES – short-term money market instruments that can easily be converted
to cash
Examples:
1. GOVERNMENT SECURITIES
Treasury bills - debt instruments representing obligations of the National Government
issued by the Central Bank and sold at a discount through competitive bidding.
- COMMERCIAL PAPERS (CPs) - short-term, unsecured promissory notes issued by
corporations with very high credit standing.
REASONS FOR HOLDING MARKETABLE SECURITIES (MS):
MS serve as substitute for cash (transactions, precautionary, and speculative) balances.
MS serve as a temporary investment that yields return while funds are idle.
DECISION CRITERIA FOR MARKETABLE SECURITIES (MS):
Risk
a. Default Risk - refers to the chances that the issuer may not be able to pay the interest or principal on
time or not at all.
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b. Reorder Point
c. Just-in-Time (JIT)
INVENTORY MODELS
A basic inventory model exists to assist in two inventory questions:
How many units should be ordered?
When should the units be ordered?
ECONOMIC ORDER QUANTITY - the quantity to be ordered, which minimizes the sum of the
ordering and carrying costs. The total inventory cost function includes:
Carrying Costs (which increase with order size)
Ordering Costs (which decrease with order size)
The following data are taken from the records of Ong Corporation for the year ended December 31 ,
Net credit sales P 576 , 000
Average materials inventory 8 , 000
Average finished goods inventory 12 , 000
Average accounts receivable 80 , 000
Average accounts payable 5 , 000
Net credit purchases 120 , 000
Raw materials used P 96 , 000
Gross profit rate 25 %
What is the average number of days in the company’s operating cash conversion cycle? (Use a
360 - day year)
MPOX, Inc. sells cellphone cases which it buys from a local manufacturer. MPOX, Inc sells 24 , 000
cases evenly throughout the year. The cost of carrying one unit in inventory for one year is P 11. 52 and
the order cost per order is P 38. 40.
What is the economic order quantity?
If MPOX, Inc would buy in economic order quantities, the total order costs is
If MPOX, Inc would buy in economic order quantities, the total inventory carrying costs per year is
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The following information is available for KAYONABA Material V
Annual usage 12 , 600 units
Working days per year 360 days
Normal lead time 20 days
The units of Material V are required evenly throughout the year.
What is the reorder point?
BUDGETING
BUDGET - a realistic plan, expressed in quantitative terms, for certain future period of time.
ADVANTAGES OF BUDGETING
- Budgets can be used by top management to communicate its plans and goals throughout the
organization.
Budgets force management to think about and plan for the future.
Through budgeting, resources are more appropriately allocated.
Through budgeting, potential bottlenecks can be discovered before they occur.
Budgeting promotes coordination of the activities of the entire organization.
The goals and objectives identified in the budgeting process can serve as benchmarks or
standards for evaluating performance.
BUDGET COMMITTEE – composed of key management persons who are responsible for overall
policy matters relating to the budget program and for coordinating the preparation of the budget itself.
MASTER BUDGET - encompasses the organization's operating and financial plans for a certain future
period of time (budget period). It is composed of the operating budget and financial budget.
TYPES OF BUDGETS AND OTHER BUDGETING CONCEPTS
The MASTER BUDGET and its different components.
CONTINUOUS (ROLLING) BUDGET - a budget that is revised on a regular (continuous) basis.
For example, a budget for 12 months is extended for another month in accordance with new data as the
current month ends.
3. FIXED BUDGET - a budget based on only one level of activity (sales or production volume)
- FLEXIBLE BUDGET – a series of budgets prepared for many levels of activity. It makes possible
the adjustment of the budget to the actual level of activity before comparing the budget figures
with the actual results.
- INCREMENTAL BUDGETING - a budgeting process wherein the current period's budget is
simply adjusted to allow for changes planned for the coming period.
- ZERO-BASED BUDGETING (ZBB) - a budget is prepared every period from a base of zero. All
expenditures must be justified regardless of variances from previous periods.
