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MANAGERIAL ACCOUNTING

Instructor: Ha Phuoc Vu, PhD

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
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COMMITMENT
- Language?

- Assessment:

- 10% for class participation

- 10% for quizzes

- 20% for group assignments

- 60% for final exam (writing, closed book)

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
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COMMITMENT (cont’d)
- Group Assignment:

- 3-4 members/group

- 4 assignments

- Quiz:

- Multiple choice questions

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Managerial Accounting

Chapter 1&2
• Managerial Accounting and Cost Concepts

Instructor: Dr. Ha Phuoc Vu

 Chapter 1 & 2
Managerial Accounting and Cost
Concepts

Big thanks to powerpoint authors:

Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
1-6

CHAPTER OUTLINE

 The work of management and the need for MA

information
 Financial Accounting vs MA
 Cost classification

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
1-7

Work of Management
Work of Management

Planning
Directing &
Motivating

Controlling

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
1-8

Comparison of Financial and Managerial

Accounting
Financial Accounting Managerial Accounting
1. Users

2. Time focus
3. Verifiability
versus relevance
4. Precision versus
timeliness
5. Subject

6. GAAP

7. Requirement
1-9

GENERAL COST CLASSIFICATION

• Manufacturing vs nonmanufacturing costs

• Product cost vs period costs
• Prime Cost and Conversion Cost
• Assign cost to cost subjects
• For making decision
• For predicting cost behavior
1-10

Classifications of manufacturing Costs

• Direct material cost: Raw materials that become

an integral part of the product and that can be
conveniently traced directly to it.

• Direct labor cost: Those labor costs that can be

easily …….. to individual units of product.

• Manufacturing overhead cost: all manufacturing

costs ……… direct material and direct labor
1-11

Classifications of
Nonmanufacturing Costs

Administrative
Selling Costs
Costs

Costs necessary to get All executive,

the order and deliver organizational, and
the product. clerical costs.
1-12

Product Costs Versus Period Costs

Product costs include Period costs are not
direct materials, direct included in product
labor, and costs. They are
manufacturing expensed on the
overhead. ……………….
Cost of
Inventory Goods Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
1-13

Product Costs Versus Period Costs

Income
Balance Sheet
Statement
Costs Inventories
Expenses
Direct Material
Revenue
Direct Labor Work in
Process Cost of
Manufacturing Goods
Overhead Sold
Finished
Goods
Selling and
Administrative

Profit/loss
1-14

Prime Cost and Conversion Cost

Manufacturing costs are often
classified as follows:

Direct Direct Manufacturing

Material Labor Overhead

Prime Conversion
Cost Cost
1-15

Assigning Costs to Cost Objects

Direct costs Indirect costs
• Costs that can be • Costs that cannot be
easily and conveniently easily and conveniently
traced to a unit of traced to a unit of
product or other cost product or other cost
object. object.
• Examples: • Example:
1-16

Cost Classifications for Decision

Making
Every decision involves a choice
between at least …………...
Only those costs and
benefits that differ
between alternatives
are relevant to the
decision. All other
costs and benefits can
and should be ignored.
1-17

Differential Costs and Revenues

Costs and revenues that differ
among alternatives.
Example: You have a job paying $1,500 per month in
your hometown. You have a job offer in a
neighboring city that pays $2,000 per month. The
commuting cost to the city is $300 per month.

Differential revenue is: Differential cost is:

Net Differential Benefit is:

1-18

Opportunity Costs
The potential benefit that is given up
when one alternative is selected
over another.
Example: If you were
not attending college,
you could be earning
24.0000.000 per year.
Your opportunity cost
of attending college for one
year is ………..
1-19

Sunk Costs
Cannot be changed by any decision. They
are not differential costs and should be
ignored when making decisions.

Example: You bought an hand phone that cost

2.000.000 two years ago. The 2.000.000 cost is
sunk because whether you use it, trade it, or sell
it, you cannot change the 2.000.000 cost.
1-20

Prepare an income
statement including
calculation of the cost of
goods sold.
1-21

The Income Statement

Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.

Merchandising Company Manufacturing Company

Cost of goods sold: Cost of goods sold:

Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 14,200
+ Purchases 234,150 + Cost of goods
Goods available manufactured 234,150
for sale $ 248,350 Goods available
- Ending for sale $248,350
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (12,100)
sold $ 236,250 = Cost of goods
sold $236,250
1-22

Inventory Flows

Withdrawals
Beginning Additions Ending
balance + to inventory = balance + from
inventory
1-23

Cost Classifications for Predicting

Cost Behavior

How a cost will react to

changes in the level of
business activity.
 variable cost
 fixed cost
 mixed cost
5-24

True Variable Cost Example

A variable cost is a cost whose total dollar amount
varies in direct proportion to changes in the
activity level (units produced, units sold, hours
worked, machine hours, kms driven)
Y

Y = ax

Y: total variable cost

a: variable cost per unit
x: activity level
x
5-25

Extent of Variable Costs

The proportion of variable costs differs across
organizations. For example . . .
A public utility with
large investments in A manufacturing company
equipment will tend will often have many
to have fewer variable costs.
variable costs.

A merchandising company
A service company
usually will have a high
will normally have a high
proportion of variable costs
proportion of variable costs.
like cost of sales.
5-26

Examples of Variable Costs

1. Merchandising companies – cost of goods sold.
2. Manufacturing companies – direct materials,
direct labor, and variable overhead.
3. Merchandising and manufacturing companies –
commissions, shipping costs, and clerical costs
such as invoicing.
4. Service companies – supplies, travel, and
clerical.
5-27

True Variable Cost

Direct materials is a true or proportionately
variable cost because the amount used during
a period will vary in direct proportion to the
level of production activity.
Cost

Volume
5-28

Step-Variable Costs
A resource that is obtainable only in large chunks
(such as maintenance workers) and whose costs
increase or decrease only in response to fairly wide
changes in activity.

Ex: fee for money transfer

Cost

- from 3m to 5m: 57.200đ

- from 5m to 10m: 66.000đ
- from 10m to 15m: 72.600đ

Volume
5-29

Step-Variable Costs
Small changes in the amount transferred are not
likely to have any effect on the fee

Only fairly wide changes in the activity

level will cause a change in the number
of maintenance workers employed.
Cost

Volume
5-30

The Linearity Assumption and the

Relevant Range
Economist’s A straight line
closely
Curvilinear Cost approximates a
Function curvilinear
variable cost
line within the
Relevant
relevant range.
Total Cost

Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)

Activity
5-31

Total Fixed Cost

A fixed cost is a cost whose total dollar amount
remains constant as the activity level changes.

Y=b

Y: total fixed cost

x
5-32

Fixed Cost Per Unit Example

Average fixed costs per unit decrease
as the activity level increases.
Y

x
5-33

Fixed Costs and Relevant Range

The relevant range of activity for a fixed cost is
the range of activity over which the graph of
the cost is flat.
Example: Office space is
available at a rental rate of
30.000.000 per year in
increments of 1.000m2. As
the business grows, more
space is rented, increasing
the total cost.
5-34

Fixed Costs and Relevant Range

90
Total cost doesn’t
Relevant change for a wide
Rent Cost

60 range of activity, and

Range
then jumps to a new
higher cost for the
30 next higher range of
activity.
0
0 1,000 2,000 3,000
Rented Area (m2)
5-35

Types of Fixed Costs

Committed Discretionary
Long-term, cannot be May be altered in the
significantly reduced short-term by current
in the short-term. managerial decisions

Examples Examples
Depreciation on Advertising and
Buildings and Research and
Equipment and Development
Real Estate Taxes
5-36

The Trend Toward Fixed Costs

The trend in many industries is toward
greater fixed costs relative to variable costs.
As machines take over Knowledge workers
many mundane tasks tend to be salaried,
previously performed highly-trained, and
by humans, difficult to replace. The
“knowledge workers” cost to compensate
are demanded for these valued employees
their minds rather is relatively fixed
than their muscles. rather than variable.
5-37

Is Labor a Variable or a Fixed Cost?

The behavior of wage and salary costs can
differ across countries, depending on
……………………………………
In France, Germany, China, and Japan,
management has little flexibility in adjusting
the size of the labor force.
Labor costs are more fixed in nature.

Most companies in the United States continue

to view direct labor as a variable cost.
5-38

Fixed Costs and Relevant Range

How does this type

of fixed cost differ
from a step-variable
cost?
5-39

Summary of variable and fixed cost behavior

Cost In total Per unit

variable

Fixed
5-40

Mixed Costs
A mixed cost has both fixed and variable
components.
Y
Total Cost

Variable
Cost

X Fixed Cost
Activity
5-41

Mixed Costs
The total mixed cost line can be expressed
as an equation: Y = a + bX

Where: Y = the total mixed cost

a = the total fixed cost (the
Y vertical intercept of the line)
Total Cost

b = the variable cost per unit of

activity (the slope of the line)
X = the level of activity

Variable
Cost

X Fixed Cost
Activity
5-42

Mixed Costs Example

If your fixed monthly home phone charge is
30.000 plus 150/minute. This month, your call
minute is 100. The total amount of your bill is:
For example: Maintenance cost of one freight
company of previous year as following:

Month Cost distance (km) Month Cost distance (km)

(1.000 đ) (1.000 đ)
1 410 2.000 7 500 4.200
2 375 1.500 8 460 3.000
3 430 2.500 9 470 3.500
4 450 3.200 10 435 2.600
5 495 4.000 11 480 3.700
6 490 3.800 12 570 5.400
5-44

Analyze a mixed cost

- the high-low method

- the scatter graph plot method
- the least squares regression method
5-45

The High-Low Method

Assume the following hours of maintenance work
and the total maintenance costs for six months.
5-46

The High-Low Method

The variable cost
per hour of
maintenance is
equal to the change
in cost divided by
the change in hours.
Hours Total Cost
High 800 $ 9,800
Low 500 7,400
Change 300 $ 2,400

$2,400
= $8.00/hour
300 hours
5-47

The High-Low Method

Total Fixed Cost = Total Cost – Total Variable Cost

Total Fixed Cost = $9,800 – ($8/hour × 800 hours)
Total Fixed Cost = $9,800 – $6,400
Total Fixed Cost = $3,400
5-48

The High-Low Method

The Cost Equation for Maintenance

Y =
 the scatter graph method
600000
Maintenance cost

500000
400000
300000
200000
100000
0
0 1.000 2.000 3.000 4.000 5.000 6.000
(km)

Linear?
the scatter graph method
600000
Maintenance cost

500000
400000
300000
200000
100000
0
0 1.000 2.000 3.000 4.000 5.000 6.000
(km)

Draw a line through the data points with about an equal

number of points above and below the line. Make sure the
straight line goes through at least one data point
 the scatter graph method
600000
Maintenance cost

500000
400000
300000
200000
Intercep = fixed cost = 309.740
100000
0
0 1.000 2.000 3.000 4.000 5.000 6.000
(km)

Use one data point to estimate the total level of activity and
the total cost
5-52

The Scattergraph Method

Make a quick estimate of variable cost per
unit and determine the cost equation.
Total maintenance at 4.000km $ 495.000
Less: Fixed cost 309.740
Estimated total variable cost for 800 patients $ 185.260

185.260
Variable cost per unit = = 46,315d/km
4.000

Y = 309.740 + 46,315 X

Total maintenance cost km

5-53

Least-Squares Regression Method

A method used to analyze mixed costs if a
scattergraph plot reveals an approximately linear
relationship between the X and Y variables.

This method uses all of the

data points to estimate
the fixed and variable
cost components of a The goal of this method is
mixed cost. to fit a straight line to the
data that minimizes the
sum of the squared errors.
- a: variable cost per unit xy = bx + a  x2
- b: fix cost
- n: number of observation y = nb + a x

Month x y xy x2
1 2.000 410.000 820.000.000 4.000.000
2 1.500 375.000 562.500.000 2.250.000
3 2.500 430.000 1.075.000.000 6.250.000
4 3.200 450.000 1.440.000.000 10.240.000
5 4.000 495.000 1.980.000.000 16.000.000
6 3.800 490.000 1.862.000.000 14.440.000
7 4.200 500.000 2.100.000.000 17.640.000
8 3.000 460.000 1.380.000.000 9.000.000
9 3.500 470.000 1.645.000.000 12.250.000
10 2.600 435.000 1.131.000.000 6.760.000
11 3.700 480.000 1.776.000.000 13.690.000
12 5.400 570.000 3.076.000.000 29.160.000
total 39.400 5.565.000 18.847.500.000 141.680.000
5-55

Least-Squares Regression Method

18.847.500.000 = 39.400 b + 141.680.000 a (1)
5.565.000 = 12b + 39.400a (2)
  a = 46,846 và b = 309.940
equation : y = 46,846 x + 309.940

- Software can be used to fit a

regression line through the data
points.

The output from the regression analysis can be used

to create an equation that enables you to estimate
total costs at any activity level.
5-56

Comparing Results From the Three

Methods
The three methods: provide slightly
different estimates of the fixed and variable
cost
Because each method uses different
amounts of the data points to provide
estimates.
Least-squares regression provides the most
accurate estimate because it uses all of the
data points.
5-57

Learning Objective

Prepare an income statement

using the contribution format.
5-58

The Contribution Format Income

Statement
Let’s put our
knowledge of cost
behavior to work by
preparing a
contribution format
income statement.
5-59

The Contribution Format

Total Unit
Sales Revenue $ 100,000 $ 50
Less: Variable costs 60,000 30
Contribution margin $ 40,000 $ 20
Less: Fixed costs 30,000
Net operating income $ 10,000

The contribution margin format emphasizes

cost behavior, by separating costs into fixed and
variable categories. Contribution margin covers
fixed costs and provides for income.
5-60

Uses of the Contribution Format

The contribution income statement format is used
as an internal planning and decision making tool.
We will use this approach for:
1. Cost-volume-profit analysis (chapter 6).
2. Budgeting (chapter 7).
3. Special decisions such as pricing and make-or-
buy analysis (chapter 11).
5-61

The Contribution Format

Used primarily for Used primarily by

external reporting. management.
Appendix 5A
Variable Costing
5-63

Learning Objective

Explain how variable costing differs

from absorption costing and compute
unit product costs under each method.
5-64

Overview of Absorption and

Variable Costing
Absorption Variable
Costing Costing
Direct Materials
Product
Product Direct Labor
Costs
Costs Variable Manufacturing Overhead

Fixed Manufacturing Overhead

Period
Period Variable Selling and Administrative Expenses
Costs
Costs Fixed Selling and Administrative Expenses
5-65

Unit Cost Computations

Harvey Company produces a single product
with the following information available:
5-66

Unit Cost Computations

Unit product cost is determined as follows:

Selling and administrative expenses are

always treated as period expenses and
deducted from revenue as incurred.
5-67

Learning Objective

Prepare income statements using both

variable and absorption costing.
5-68

Income Comparison of
Absorption and Variable Costing
Let’s assume the following additional information
for Harvey Company.
• 20,000 units were sold during the year at a price of
$30 each.
• There is no beginning inventory.

Now, let’s compute net operating

income using both absorption
and variable costing.
5-69

Absorption Costing
5-70

Variable Costing
Variable Costing
Sales
Less variable expenses:
Beginning inventory
Add COGM
Goods available for sale -
Less ending inventory
Variable cost of goods sold -
Variable selling & administrative
expenses
Contribution margin
Less fixed expenses:
Manufacturing overhead
Selling & administrative expenses -
Net operating income
5-71

Variable Costing
Variable
manufacturing
Variable Costing
costs only.
Sales (20,000 × $30) $ 600,000
Less variable expenses:
Beginning inventory $ -
Add COGM (25,000 × $10) 250,000
All fixed
Goods available for sale 250,000
manufacturing
Less ending inventory (5,000 × $10) 50,000
overhead is
Variable cost of goods sold 200,000 expensed.
Variable selling & administrative
expenses (20,000 × $3) 60,000 260,000
Contribution margin 340,000
Less fixed expenses:
Manufacturing overhead $ 150,000
Selling & administrative expenses 100,000 250,000
Net operating income $ 90,000
5-72

Reconcile variable costing and

absorption costing net operating incomes

Absorption costing net operating income

Add: Fixed manufacturing overhead costs of
beginning inventory (released from inventory)
Deduct: Fixed mfg. overhead costs of ending
inventory (deferred in inventory )
= Variable costing net operating income
5-73

Extended Comparison of Income

Data Here is information about the operation
of Harvey Company for the second year.
5-74

Unit Cost Computations

Since there was no change in the variable costs

per unit, total fixed costs, or the number of
units produced, the unit costs remain unchanged.
5-75

Absorption Costing
Absorption Costing
Sales (30,000 × $30) $ 900,000
Less cost of goods sold:
Beg. inventory (5,000 × $16) $ 80,000
Add COGM (25,000 × $16) 400,000
Goods available for sale 480,000
Less ending inventory - 480,000
Gross margin 420,000
Less selling & admin. exp.
Variable (30,000 × $3) $ 90,000
Fixed 100,000 190,000
Net operating income $ 230,000

These are the 25,000 units

produced in the current period.
5-76

Variable
Variable Costing manufacturing
costs only.

All fixed
manufacturing
overhead is
expensed.
5-77

Learning Objective

Reconcile variable costing and

absorption costing net operating
incomes and explain why the two
amounts differ.
5-78

Comparing Absorption and

Variable Costing: Year 1
Let’s compare the methods.
5-79

Comparing Absorption and

Variable Costing: Year 1
We can reconcile the difference between absorption
and variable net operating income as follows:
Variable costing net operating income $ 90.000
Add: Fixed mfg. overhead costs
deferred in inventory
(5,000 units × $6 per unit) 30.000
Absorption costing net operating income $ 120.000

Fixed mfg. overhead $150,000

= = $6.00 per unit
Units produced 25,000 units
5-80

Comparing Absorption and

Variable Costing: Year 2
We can reconcile the difference between absorption
and variable net operating income as follows:
Variable costing net operating income $ 260.000
Deduct: Fixed manufacturing overhead
costs released from inventory
(5,000 units × $6 per unit) 30.000
Absorption costing net operating income $ 230.000

Fixed mfg. overhead $150,000

= = $6.00 per unit
Units produced 25,000 units
5-81

Comparing Absorption and

Variable Costing: Years 1 and 2
5-82

Summary of Key Insights

NOI = net operating income