MBA

Managerial Accounting

Dr. Haybat M.
Faculty of Business - Alex University
[email protected].
01229111130

1
Do you remember?
 What is the Accounting?

Who are the users

of accounting information?

What are the Boards of the Accounting Standards ?

What is the Accounting?
 What is the Accounting?

➢ Accounting is
an Information System
,
➢ The main objective of accounting is to
provide useful information to
the interested users,
to help them in decision making
Who are the users of Accounting information?
 The Users of Accounting Information

Internal Users External Users

Management of The Investors (owners),

business Creditors, Suppliers.
(Finance, Marketing, Banks,
Human Resources,…) Tax authority,
Labor unions,….

✓ Managerial Accounting Financial Accounting

What are the Boards of the Accounting Standards ?
 Boards of Accounting

➢ Financial Accounting Standards Board

FASB A privately funded organization, formulates
accounting standards.

GAAP ➢ Generally Accepted Accounting Principles

Main U.S. accounting rule book

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 Boards of Accounting

➢ International Accounting Standards Board

IASB Publishes the International Financial Reporting
Standards, the international accounting rule book

➢ International Financial Reporting Standards

IFRS (IFRS) issued by the International Accounting
Standards Board (IASB).

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 BOARDS OF ACCOUNTING

What about
the Accounting Standards in
Egypt?

IFRS

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 ‫‪Egyptian Accounting Standards‬‬

‫معايير المحاسبة المصرية‬

‫‪2015‬‬
‫المحتويات‬
‫رقم المعيار‬
‫‪Preface‬‬ ‫تمهيد ‪.........................................‬‬
‫إطار إعداد وعرض القوائم المالية ‪Frame Work ...............‬‬
‫‪IAS 1‬‬ ‫عرض القوائم المالية ‪.............................‬‬ ‫‪)1‬‬
‫‪IAS 2‬‬ ‫المخزون ‪..........................................‬‬ ‫‪)2‬‬
‫‪IAS 7‬‬ ‫قائمة التدفقات النقدية ‪...............................‬‬ ‫‪)4‬‬
‫‪........................................................................‬‬

‫‪IFRS 13‬‬ ‫قياس القيمة العادلة ‪..........................‬‬ ‫‪)45‬‬

 COURSE CONTENT
Title

1) The Differences Between Financial & Managerial Accounting

2) Managerial Accounting Activities

3) Cost Terms , Concepts and Classifications

4) Relevant Information and Decision-Making
5) The Master Budget
6) Standard Costing and Variance Analysis
The Differences Between Financial & Managerial Accounting
Financial accounting ✓ Managerial accounting
provides general provides financial and
purpose financial nonfinancial information
information to those for managers of an
who are outside organization and other
the organization. decision makers.
 The Differences Between Financial & Managerial Accounting

Financial Accounting Managerial Accounting

1) Users External persons Managers who plan for
who make financial decisions and control an organization

2) Time focus Historical information Future information

3) Precision versus
Emphasis on precision Emphasis on timeliness and relevance
timeliness

4) Subject Primary focus is on Focus on segment reports

company reports
5) Rules Must follow GAAP / IFRS Not bound by GAAP / IFRS
6) Requirement Mandatory for external reports Not Mandatory

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DO IT!

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 DO IT!
➢ Indicate whether the following statements are true or false.

1. Management accounting information focuses on external reporting.

False

2. Management accounting has to strictly follow the rules of GAAP for the
purposes of measurement and reporting.
False
Managerial Accounting Activities
 Managerial Accounting Activities

Planning

Controlling

Decision
Making
 Managerial Accounting Activities

Planning

Establish Goals.

Specify How Goals Will Be Achieved.

Develop Budgets.

➢ For example :
?
How many units should we plan to produce next period?
 Managerial Accounting Activities

Controlling

The control function gathers feedback to

ensure that plans are being followed.

➢ For example :

?
Did we spend actually more or less than expected for
the units we actually produced?
 Managerial Accounting Activities

Decision Making

Decision making involves making

a selection among competing alternatives.

?
➢ For example :
Accept or reject a special order
Cost Terms , Concepts and Classifications
 Cost Terms, Concepts and Classifications

➢ The terms and classifications of costs are determined according to

the purpose (planning ,controlling and decision making) as follows:

1) Cost classifications for predicting cost behavior.

2) Manufacturing & Nonmanufacturing cost categories.

3) Relevant costs for decision making.

Cost Behavior
Cost Classifications for Predicting Cost Behavior

Cost behavior :
It refers to how a cost will react to the changes
in the level of activity.
➢ The most common classifications are:
1. Variable costs.
2. Fixed costs.
3. Mixed costs.
?
 Variable Costs

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 Variable Costs

Activity level 1,000 units 2,000 units 3,000 units

Cost
5,000 10,000 15,000
Cost/unit
5 5 5

Cost/unit = Total cost / units

 The Variable Cost

Total variable cost

Increase and decrease in proportion to changes in the activity level.

Variable cost per unit

remains constant.
 The Variable Cost

❑ Your Total Direct Material is based on

how many Units you produce.

➢ If you produce 100 units the total

Total Direct Material

material cost is $10000

➢ When you produce 200 units the
total material cost is $20000

Number of Units produced

31
 The Variable Cost Per Unit
❑ The cost per unit produced is constant
at $100 per unit.

Cost Per Unit

$10000/100 units= $100 per unit
$100
$20000/200 units= $100 per unit

Number of Units produced

32
 The Activity Base (Cost Driver)

Units Machine
produced hours

A measure of
what causes
the incurrence of
a variable cost

Labor Miles
hours driven
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 Fixed Costs

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 Fixed Costs

Activity level 1,000 units 2,000 units 3,000 units

Cost 20,000 20,000 20,000

Cost/unit
20 10 6.66
 The Fixed Cost

Total fixed cost

is not affected by changes in the activity level within the relevant range.

Fixed cost per unit

decreases as the activity level increases and
increases as the activity level decreases.
 The Fixed Cost

Your monthly rent for plant building is fixed

regardless the number of units produced at this plant.
Monthly Rent

➢ If you produce 1000 units the total

$20000 rent is $20000
➢ When you produce 2000 units the
total rent is $20000

Number of units produced 37

 The Fixed Cost Per Unit

The average fixed cost per unit produced decreases

as more units are produce.

Monthly Rent cost

➢ $20000/1000 units= $20 per unit
➢ $20000/2000 units= $10 per unit

Number of Units produced

38
Fixed Costs and the Relevant Range

39
 Fixed Costs and the Relevant Range

➢For example, assume office space is available at a rental

rate of $30,000 per year in increments of 1,000 square feet.

❖ Fixed costs would increase in a step fashion

at a rate of $30,000
for each additional 1,000 square feet.
 Fixed Costs and the Relevant Range
(in Thousands of Dollars )

90
➢ The relevant range of
Relevant activity for a fixed cost
Rent Cost

60 is the range of activity

Range over which the graph
of the cost is flat.

30

0
0 1,000 2,000 3,000

Rented Area (Square Feet)

The Comparison between Variable and Fixed Costs
 The Comparison between Variable and Fixed Costs

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost Increase Variable cost per unit

and decrease in proportion remains constant.
to changes in the activity level.
Fixed Total fixed cost is not affected Fixed cost per unit decreases
by changes in the activity as the activity level rises and
level within the relevant range. increases as the activity level falls.
DO IT!
1) Quick Check ✓

Which of the following costs would be variable with

respect to the number of cones sold at a Baskins &
Robbins shop?
(There may be more than one correct answer.)

A. The cost of lighting the store.

B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
1) Quick Check ✓

Which of the following costs would be variable with

respect to the number of cones sold at a Baskins &
Robbins shop? (There may be more than one correct
answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.

Note: The cost of ice cream and the cost of napkins for customers
would be variable costs. As Baskins and Robbins sells more ice cream
cones, we would expect the total cost of ice cream and napkins to
increase.
2) When 10,000 units are produced, variable costs are $6
per unit. Therefore, when 20,000 units are produced:
a. variable costs will total $60,000
b. variable costs will total $120,000
c. variable unit costs will increase to $12 per unit
d. variable unit costs will decrease to $3 per unit

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3) When 10,000 units are produced, fixed costs are $14 per unit.
Therefore, when 20,000 units are produced fixed costs will:
a. increase to $28 per unit
b. remain at $14 per unit
c. decrease to $7 per unit
d. total $280,000

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 Mixed Costs

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 Mixed Costs

Activity level 1,000 units 2,000 units 3,000 units

Cost 16,000
12,000 14,000

Cost/unit
12 7 5.33
 Mixed Cost

(also called semivariable costs)

➢ A mixed cost contains both variable and fixed elements.

➢ Consider the example of utility cost and maintenance costs.

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 Mixed Cost
(also called semivariable costs)

➢ A mixed cost contains both variable and fixed elements.

➢ Consider the example of utility cost and maintenance costs.

Y
Total Utility Cost

Variable Cost per KW

Fixed Monthly
X Utility Charge
Activity (Kilowatt Hours)
 The 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.
b = The variable cost per unit of
Y
activity.
Total Utility Cost

X = The level of activity.

Variable Cost per KW

X Fixed Monthly
Activity (Kilowatt Hours) Utility Charge
 Mixed Costs - Example

➢ If your fixed monthly utility charge is $40,

your variable cost is $0.03 per kilowatt hour, and
your monthly activity level is 2,000 kilowatt hours,
what is the amount of your utility bill?
 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.
b = The variable cost per unit of
activity.
Solution X = The level of activity.

Y = a + bX
Y = $40 + ($0.03 X )
Y = $40 + ($0.03 × 2,000)
Y = $100
DO IT!
Quick Check
➢ Taylor Company is determining the cost behavior of several items in order to budget
for the upcoming year. Past trends have indicated the following dollars were spent at
three different levels of output:

Unit Levels 10,000 12,000 15,000

Cost A $25,000 $29,000 $35,000

Cost B 15,000 15,000 15,000

Cost C 15,000 18,000 22,500

➢ In establishing a budget, Taylor should treat Costs A, B, and C, respectively, as

A. Variable, fixed, and variable.
B. Variable, fixed, and Semivariable.
C. Semivariable, fixed, and semivariable.
D. Semivariable, fixed, and variable.
Analysis of Mixed Costs

?
Analysis of Mixed Costs

❑ The accountant can

analyze the mixed cost to variable and fixed
using :
The High-Low Method

➢ What are the steps of it??

 The Steps of the High-Low Method
1) The first step is to choose the highest and lowest activity levels .

2) The second step is to determine the total costs

at the highest & lowest activity levels .

3) The third step is to calculate the variable cost per unit of activity
( the change in cost step2 and divide it
by the change in activity level step1)

4) The fourth step is to calculate the total fixed costs

(taking the total cost at either activity level the highest or the lowest ,
and deduct the variable cost component .
The residual represents the estimate of total fixed costs .)

5) The fifth step is to construct an equation that can be used to

estimate the total cost at any activity level (Y = A+ b X).
Examples
 The High-Low Method – Example (1)
❑ The following is the information of maintenance costs for the previous months:

Required:
1) Analyze the maintenance costs using the High-Low Method
2) Prepare the equation of the cost.
 The High-Low Method

1) The first step is to choose the highest and lowest activity levels.
 The High-Low Method
2) The second step is to determine the total costs
associated with the two chosen points .
 The High-Low Method
3) The third step is to calculate the variable cost per unit of activity

➢ The variable cost per hour of maintenance

= (the change in cost / the change in hours)

$2,400
= $6 /hour
400
 The High-Low Method

4) The fourth step is to calculate the fixed costs

Total Cost = Total Fixed Cost +Total Variable Cost

Total Fixed Cost = Total Cost – Total Variable Cost

?
 The High-Low Method
4) The fourth step is to calculate the fixed costs

Total Fixed Cost = Total Cost – Total Variable Cost

Total Fixed Cost = $9,800 – ($6/hour × 850 hours)
 The High-Low Method

4) The fourth step is to calculate the fixed costs

Total Fixed Cost = Total Cost – Total Variable Cost

Total Fixed Cost = $9,800 – ($6/hour × 850 hours)

Total Fixed Cost = $9,800 – $5,100

Total Fixed Cost = $4,700

 The High-Low Method
5) The fifth step is to construct an equation at any activity level (Y = A+ b X).

➢ The Cost Equation for Maintenance

Y = $4,700 + $6 X
 The High-Low Method – Example (2)

The following data pertains to activity and maintenance costs for two recent
years:

Using the high-low method, the cost formula for maintenance costs is:
A. $1.50 per unit
B. $1.20 per unit
C. $3,000 plus $0.75 per unit
D. $6,000 plus $0.75 per unit
Solution

1) Variable cost per unit = Change in cost  Change in activity

= $3,000  4,000 units
= $0.75 per unit*

2) Fixed cost = Total cost - Variable cost

➢ If we use the high level of activity.
= $15,000 - (* $0.75 per unit  12,000 units)
= $15,000 - $9,000
= $6,000

➢ The answer is ($ 6,000 plus $0.75 per unit) (D)

Quick Check ✓

➢ Sales salaries and commissions are $10,000 when

80,000 units are sold, and $14,000 when 120,000
units are sold. Using the high-low method,
what is the variable portion of sales salaries and
commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit
Quick Check ✓

Sales salaries and commissions are $10,000 when

80,000 units are sold, and $14,000 when 120,000
units are sold. Using the high-low method,
what is the variable portion of sales salaries and
commission?
a. $0.08 per unit
Units Cost
b. $0.10 per unit High level 120,000 $ 14,000
c. $0.12 per unit Low level 80,000 10,000
d. $0.125 per unit Change 40,000 $ 4,000

$4,000 ÷ 40,000 units

= $0.10 per unit
Quick Check ✓
➢ Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000
units are sold. Using the high-low method,
what is the fixed portion of sales salaries and
commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000
Quick Check ✓
➢ Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000
units are sold. Using the high-low method,
what is the fixed portion of sales salaries and
commissions?
a. $ 2,000 Total cost = Total fixed cost +
b. $ 4,000 Total variable cost

c. $10,000 $14,000 = Total fixed cost +

($0.10 × 120,000 units)
d. $12,000
Total fixed cost = $14,000 - $12,000
Total fixed cost = $2,000
Manufacturing & Nonmanufacturing costs
77
Indirect cost

78
Indirect cost

79
 Manufacturing Costs

80
 Classifications of Manufacturing Costs

Direct Direct Manufacturing

Materials Labor Overhead

The Product
Manufacturing costs are usually grouped into three main categories:
direct materials, direct labor, and manufacturing overhead. These costs
are incurred to make a product
Direct Materials

Raw materials that become an integral part

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

➢ Example:
- A radio installed in an automobile
- The cost of glass is a direct materials cost in light bulb
manufacturing.
 Direct Labor

Those labor costs that can be easily traced to

individual units of product.

Example: Wages paid to automobile assembly workers

 Manufacturing Overhead

➢Manufacturing costs that cannot be easily traced

directly to specific units produced.
Examples: Indirect materials and indirect labor

Materials used to support the Wages paid to employees who

production process. are not directly involved in
Examples: cleaning supplies production work.
used in the automobile Examples: maintenance
assembly plant. workers and security guards.

➢ Manufacturing overhead includes all manufacturing costs

except direct materials and direct labor. These costs cannot be easily traced
to specific units produced (also called indirect manufacturing cost, factory overhead).
Prime Cost & Conversion Cost
 Manufacturing costs
are often classified as follows:

Direct Direct Manufacturing

Material Labor Overhead

Prime
Cost
 Manufacturing costs
are often classified as follows:

Direct Direct Manufacturing

Material Labor Overhead

Conversion
Cost
The Differences Between
Direct & Indirect Costs
 The Differences Between Direct & Indirect Costs

Direct costs Indirect costs

• Costs that can be • Costs that cannot be
easily and easily and
conveniently traced to conveniently traced to
a unit of product or a unit of product or
other cost object. other cost object.
• Examples: • Example:
manufacturing
direct material &
overhead
direct labor
 Non-manufacturing Costs

90
 Classifications of Non-manufacturing Costs

Selling Administrative
Costs Costs

Costs necessary to secure All executive,

the order and deliver the organizational, and
product. clerical costs.
Product Costs & Period Costs
 Product Costs Versus Period Costs

Product costs* Period costs **

include include all
direct materials, direct labor, selling costs and administrative
and manufacturing overhead. costs.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
*Manufacturing Costs **Non-manufacturing Costs
DO IT!
 ❑ State whether the following statements true or false:

T F
Manufacturing overhead combined with direct materials is known as
1) conversion cost. *
When the level of activity increases, total variable cost will increase.
2) *
A mixed cost is partially variable and partially fixed.
3) *
4) Indirect costs, such as manufacturing overhead, are always fixed costs *
➢ Manufacturing overhead consists of:
A. all manufacturing costs.
B. indirect materials but not indirect labor.
C. all manufacturing costs, except direct materials and direct labor.
D. indirect labor but not indirect materials.
Quick Check ✓

➢ Which of the following costs would be

considered a product rather than a period cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
E. Sales commissions.
Quick Check ✓

➢ Which of the following costs would be

considered a product rather than a period cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
E. Sales commissions.
 Prepare Income Statement
using
the Traditional & Contribution Formats.
 The Traditional & Contribution Formats

Used primarily for Used primarily by

External Reporting management.
 The Traditional & Contribution Formats

Used primarily for Used primarily by

External Reporting Management.
 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 (CVP) analysis.
2) Budgeting.
3) Special decisions such as pricing and make-or-buy.
Relevant Costs for Decision Making
 Cost Classifications for Decision Making

❑Every decision involves a choice between at least two

alternatives.

➢Only those costs and benefits that

differ between alternatives are relevant in a decision.

➢All other costs and benefits can and should be ignored

as irrelevant.
 Cost Classifications for Decision Making

A relevant cost
is a cost that differs between alternatives.

A relevant benefit
is a benefit that differs between alternatives.
 Cost Classifications for Decision Making

❑ Cost Classifications for Decision making:

In decisions making, there are three types of cost:

1) Differential cost,
2) Sunk cost, &
3) Opportunity cost.
 1) Differential cost:

➢ Differential cost
is a cost that varies from alternative to another.
➢ Differential cost
can be either fixed or variable.tsoc

- It si relevant cost for decision making.

- It should be considered when making a decision

 2) Sunk cost

➢ Sunk
cost
is a cost that not varies from alternative to another.
➢ Sunk cost
can be either fixed or variabletsoc .

- It si irrelevant cost for decision making.

- It should be ignored when making a decision.

DO IT!
 Example

ABC Company is thinking about changing its marketing method from

distribution through retailers to distribution by door- to- door direct sale.
Present costs are compared to projected costs in the following table:
Retailer Direct sale
distribution distribution
(Present( (Proposed(
Cost of goods sold 300,000 400,000 Differential cost
Advertising 80,000 40,000 Differential cost
Commissions 00 30,000 Differential cost
Warehouse dep. 50,000 50,000
Sunk cost

Other expenses 40,000 40,000 Sunk cost

Required: Determine the type of each cost ) Differential cost or Sunk cost).
Opportunity Cost

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 $15,000 per year.

➢ Your opportunity cost

of attending college for one year is
$15,000.