Program : BACHELOR OF SCIENCE IN

OFFICE MANAGEMENT

Course Code : MACC 423

Course Title : MANAGERIAL ACCOUNTING

Course Credit : 3 units Contact Hours : 54

BULACAN POLYTECHNIC COLLEGE

Bulihan, City of Malolos
 Managerial Accounting
MODULE MATERIALS

List of Modules

No. MODULE
MODULE TITLE
CODE

1 Introduction to Managerial Accounting MACC 423-1

2 Controllership MACC 423-2

3 Managerial Accounting As A Career MACC 423-3

4 Managerial Cost Concepts MACC 423-4

5 Costs & Margin Concepts MACC 423-5

6 Cost Behavior Analysis MACC 423-6

7 Estimating Cost Behavior MACC 423-7

8 Cost-Volume-Profit (CVP) Analysis MACC 423-8

9 Job Order Costing & Process Costing MACC 423-9

10 Budgetary Planning-Strategy & The Master Budget MACC 423-10

11 Statement of Cash Flows MACC 423-11

12 Financial Statements Analysis MACC 423-12

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 2 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 MACC 423-4
Managerial Cost Concepts

MODULE MATERIALS

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 3 of 18
College
Managerial Accounting
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 MANAGERIAL
COST CONCEPTS
(MACC 423-4)

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 4 of 18
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Managerial Accounting
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 MODULE CONTENT
COURSE TITLE: Managerial Accounting

MODULE TITLE Managerial Cost Concepts

NOMINAL DURATION: 9 Hours

SPECIFIC LEARNING OBJECTIVES:

At the end of this module, you MUST be able to:
1. Master the concept of cost; distinguish between variable and fixed costs.
2. Understand the importance of identifying the organization’s cost drivers.
3. Understand what is meant by “different costs for different purposes.”
4. Distinguish among direct, indirect, controllable and uncontrollable costs.
5. Distinguish among product costs, period costs and expenses.
6. Provide examples of three types of manufacturing costs.

TOPICS: (Sub-Topics)
1. Definition of Cost
2. Different Cost for Different Purposes
3. Categories of Cost
4. Marginal & Average Costs
5. Product & Period Costs
6. Manufacturing Costs
7. Non-Manufacturing Costs
8. Service Organization Costs
9. Statement of Cost of Goods Manufactured & Sold
ASSESSMENT METHOD/S:
Quiz-Multiple Choice
REFERENCE/S:
1. Cabrera, Ma. Elenita Balatbat
Management Accounting-Concepts and Applications,
2017 Edition
Manila: GIC Enterprises
2. A) Mejorada, N.D.
Introduction to Management Accounting, 2018 Edition
Makati City: Goodwill Trading Co., Inc.
3. A) Sollenberger and Schneider
Managerial Accounting, 9th Edition 2016
Hoboken, New Jersey, USA: John Wiley and Sons
B) Homgren, Sundem and Stratton
Introduction to Management Accounting 10th Edition, 2017
Upper Saddle River, New Jersey, USA: Pearson Prentice Hall
C) Engler, Calvin
Managerial Accounting, 3rd Edition
Irwin, Homewood, Illinois 60430

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 5 of 18
College
Managerial Accounting
Document No. Developed by:
MACC 423 Eugene A. Ruano Revision # 02
30- MACC 423
 Boston, MA, USA 02116

4. Vicente, Ma. Violeta V.

Cost Accounting & Cost Management, 2016 Edition
Mutual Books Inc. Distributors & Publishers
Mandaluyong City, M.M. 1552

Bulacan Date Developed:

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Office Management Polytechnic Date Revised: Page 6 of 18
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Managerial Accounting
Document No. Developed by:
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 Information Sheet
MACC 423-4
Managerial Cost Concepts

Learning Objectives:
After reading this INFORMATION SHEET, YOU MUST be able to:
1. Prepare a schedule of cost of goods sold and an income statement for a
manufacturer.
2. Describe the elements involved in a cost of goods sold.
3. Prepare a statement of cost of goods manufactured & sold.

INTRODUCTION

For an accountant, the term cost can have many different definitions.
Thus, in a simple transaction, the cost of an item like an adding machine is the
cash paid to acquire it, regardless of either the cash is paid at the time of the
purchase or at a later time. The nature of business may also determine the way
costs are described. Although manufacturing, merchandising, and service
industries may incur the same kind of costs, the description of the costs may
differ in each industry.
DEFINITION OF COST
Resource sacrificed or foregone to achieve a particular objective
Amount paid or cash equivalent value exchanged for goods or services that
will give current or future benefits to the business enterprise
Sacrifice made to acquire a good or service
Involves a cash outflow so it controlled-the lower it is better to the company
& one of the competitive advantages a business can have over competitors
is to have the goods or services that provide the same or greater value to
customers at a lower cost.
Cost Object is anything for which cost measurement is desired. This may be a
product, service, project, brand category, an activity, a department or a program.
Chosen to help decision making.
Activity is basic unit of work within an organization. It is an aggregation of
actions within a business entity useful to managers in planning, controlling and
decision making.
Bulacan Date Developed:
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Managerial Accounting
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Cost Driver is a factor that has a direct cause-effect relationship to cost.
Purposes of Costs
1) Pricing a product for sale to customers
2) Valuing inventories when preparing an income statement
3) Evaluating the performance of groups of employees
4) Making decisions regarding alternative courses of action
5) Budgeting for future operations
Expenses are expired costs are shown as deduction from revenues and consist
of such items as the current period rent, telephone bill, advertising, salaries and
electric bill.
DIFFERENT COSTS for DIFFERENT PURPOSES
Costs are group in any of several ways by an accountant or manager for
descriptive purposes
1. As they relate to a specific product
2. As they relate to a period of time rather than to a specific product
3. By category based on behavior patterns
4. Into those needed to reach a managerial decision
5. Into those needed for performance evaluation
CATEGORIES OF COSTS
A. Time of Incurrence
1. Historical Resource sacrificed or foregone, i.e.
cost already incurred
2. Budgeted Planned or predetermined amount,
cost forecasted or future cost
3. Replacement Amount of cash required to replace
the same product or service at
present
B. Reaction to Activity Level
1. Fixed cost Total does not change in direct
relation to change in volume within
the relevant range
2. Variable cost Changes in direct proportion to a
change in volume
3. Semi-variable or mixed cost Hybrid between fixed and variable
costs. Fixed up to a certain point,
beyond this point, it becomes
variable

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Managerial Accounting
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Relevant Range is the specified range of activity over which a variable cost
remains constant per unit or fixed cost remains fixed in total.
C. Based on Financial Statement Presentation
1. Expired cost Those for which benefits have been
received and therefore are shown on
the income statements. Also known
as expenses
2. Unexpired cost Involve cash outlays, the benefits
from which extend beyond the
accounting period of one year.
Constitute prepayments are shown
as assets in the balance sheet, i.e.
prepaid expenses
D. Impact on Decision Making
1. Relevant cost May be quantitative or qualitative
that is logically associated with or
pertinent to a specific problem or
decision
2. Out-of-pocket cost Amount paid or to be paid for a
particular product or service or
activity
3. Sunk cost Cost incurred in the past and not
relevant to any future courses of
action or decision. It is historical
cost associated with the acquisition
of an asset or resource
4. Opportunity cost Potential benefit that is foregone if
an alternative is choses over
another
5. Direct cost Cost distinctly and conveniently
traceable to a particular cost object
6. Indirect cost Cannot be traced explicitly to a cost
object and known as common cost
7. Quality cost Cost associated with conforming to
standards such as prevention,
appraisal, and failure costs
Improvement of quality by
a. Prevention preventing product defects resulting
from dysfunctional processing
b. Appraisal Incurred for monitoring since some
mistakes are not eliminated through
prevention activities
Internal loss such as scrap or
c. Failure rework, or external loss such as

Bulacan Date Developed:

Bachelor of Science in February 2021
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 warranty cost, or cost of recalling
defective product
E. Based on Production
1. Prime cost sum of direct materials & direct labor
2. Conversion cost sum of direct labor and overhead
F. Within a department either producing or service
Direct Indirect
departmental departmental Common cost Joint cost
charge charge
Cost is directly Expenses, the Same as indirect, Occurs when 2 or
traceable to the benefits of which allocation has to more products
product that may be shared be made are produced at
passes the with the other proportionately the same time
department departments to the such as those
departments coming from raw
receiving the materials.
benefits Examples are
meat-packing,
lumber, and
liquor industries
where
production costs
have to be
allocated to the
different
products
manufactured

G. In relation to accounting period

Capital expenditures Revenue expenditures
 Relate to use of resources for Benefit only the current accounting
future benefits-the benefits period and therefore recorded as an
extending over two or more expense
accounting periods
 Recorded as assets
 Termed as inventoriable costs
reflected on the books sectors-
service, merchandising and
manufacturing
Other Bases of Cost Classification
1. Based on business functions
a. Design of products, services & processes
b. Production
c. Marketing

Bulacan Date Developed:

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 d. Distribution
e. Customer service
f. Strategy & administration
2. Based on assignment to cost objects
a. Direct
b. Indirect
3. Based on behavior pattern in relation to changes at a cost driver
a. Variable
b. Fixed
4. Based on aggregate or average
a. Total
b. Unit
5. Based on asset or expense
a. Inventoriable
b. Non-inventoriable capitalized
c. Period cost
MARGINAL & AVERAGE COSTS
Marginal Average
Change in total cost when another Total costs divided by the number of
unit is produced goods produced.
Example: P10,000,000/10,000 units
= P1,000 per unit

PRODUCT & PERIOD COSTS

Product Cost Period Cost
Cost associated in producing Cost that cannot be capitalized
or acquiring inventory into prepaid expenses,
inventory or fixed assets
Referred to as inventoriable
cost Associated with the passage of
time with a transactional event
Includes materials, labor, and
when they are incurred
overhead that form part of a
finished product Not included in the cost of
goods sold on the single format
Sum of the costs assigned to
income statement
an item for sale depending
upon the specific purpose Includes general and
administrative expenses,
marketing expenses, rent (not
directly tied to a production
facility), office depreciation,
and indirect labor, interest
expenses on a company’s debt,
sales salaries, sales
commissions, delivery
expenses, advertising expense

Bulacan Date Developed:

Bachelor of Science in February 2021
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 Usually benefit a specific
period of time and are not
related to production or
product costs

MANUFACTURING COSTS & NON-MANUFACTURING COSTS

Costs in relation to a product
Manufacturing Costs Non-manufacturing Costs or
Commercial costs
Cost incurred in producing a Incurred outside the factory or
product production department
Include the following costs: Examples are advertising
costs, salaries and
1. Direct materials
commissions of sales
 Items that can easily personnel, storage costs,
be identified or shipping and delivery,
traced or seen in the customer service, & general
finished good. and administrative expenses
Examples are wood
Also known as period costs
for furniture, leather
for shoes, cloth for Include selling and
dresses, and paper administrative expenses such
for books as advertising, sales
commission, executive and
 Form an integral part
general staff salaries, and
of finished product
other general expenses
and included directly
in the computation of
product costs
2. Direct labor
 Wages paid to factory
workers who have a
direct hand in the
conversion of raw
materials to finished
goods. Using same
examples in direct
materials are
carpenters’ wages
and sewers/tailors
salaries are direct
labor for furniture
and ready-made
dresses
manufacturing
respectively. Shoe
makers’ salaries and
printing press
operators’ salaries

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 12 of 18
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Managerial Accounting
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 are direct labor for
shoe making and
book printing
respectively.
3. Factory or manufacturing
overhead
 Other than direct
materials and direct
labor such as
indirect materials
and indirect labor,
depreciation of
machines, utility
expenses, and other
factory supplies.
 Indirect materials
are needed for the
completion of
finished product
which is either
minimal or complex
and they cannot be
easily traceable to
the product such as
lubricating oil,
grease, cleaning
rags, brushes and
other items needed
for making the
machines and
working area clean &
functional.
 Indirect labor
includes wages paid
to factory helpers,
supervisors,
timekeepers, and
other clerks or
employees assigned
to the maintenance
work that is not
directly related to
production

SERVICE ORGANIZATION COSTS

Reasonable and actual out-of-pocket costs attributable to the provision of
the applicable service calculated as the product of (i) intercompany charge-
out rate and (ii) the number of hours attributable to the provision of such
service
Bulacan Date Developed:
Bachelor of Science in February 2021
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 Cost of goods sold (COGS) also referred to as cost of sales or cost of services
is how much it costs to produce or provide your goods or services. COGS
include direct material and direct labor expenses that go into the
production of each good or service that is sold.
Separating Fixed from Variable in a Mixed or Semi-Variable Cost
Distinction is important in the controlling functions of the managers
Variable may be separated from fixed by using the following methods:
1. High-low method
2. Regression or Scatter diagram method
3. Least squares method
Example: Let us assume that in the management of a small hotel business
providing 50 rooms to guests, the following occupancy and electric power
consumption for the first 6 months of the year took place:
Month Occupancy Power Consumption
January 20 P 45,000
February 30 55,000
March 28 52,000
April 26 51,000
May 35 65,000
June 32 61,000
Total P329,000
1. High-low method
High point is 35=P65,000 Low point is 20=P45,000
35-20=15 P65,000-45,000=P20,000
P20,000/15=P1,333.33 variable element for every one room change, so
that when applied to the month of May, P1,333.33 * 35=P46,666.67 which
is the total variable element in the mixed cost of P65,000, therefore the
fixed element is P18,333.33 (P65,000-P46,666.67).
If the linear equation is used in this method, the equation will be:
Y = f + VX
Where Y = total activity cost
f = fixed cost element
V = variable cost per unit of activity
X = measure of activity output
Occupancy Cost
X1 Y1 = low point
X2 Y2 = high point
V = change in cost/activity change
= (Y2-Y1)/(X2-X1)
f = total mixed cost – variable cost
= Y2-VX2
substituting F = Y1 – VX1
V = (P65,000 – P45,000) / (35 – 20)
= P1,333.33
F = P65,000 – (P1,333 * 35)

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 14 of 18
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Managerial Accounting
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 = P18,333.33 being the fixed cost element, therefore
the variable cost element in May is P46,666.67 (P1,333.33 * 35) while in
January, fixed cost element being P18,333.33, the variable cost element is
P26,666.67 (P45,000 – P18,333.33).
2. Regression Chart or Scatter Diagram
 more accurate than high-low method
 mixed cost is measured vertically and the room occupancy
horizontally
 cost prediction formula is y = a + bx, where a is fixed element and
b is variable element multiplied by x which is the measure of
activity/volume, the sum of the two is the total mixed cost.

The variable element for each point change in the occupancy is P1,333.33. the
increase in number of rooms (from 2- to 35 rooms) causes a power consumption
increase of P20,000. One of the disadvantages of this method is that the line of
best fit chosen by one analyst may be different from the line choses by the
manager. If this happens, different fixed cost and variable cost will be arrived at.
3. Least squares method
 More objectively arrived at than the scatter diagram
 Defines best fitting and is objective in the sense that using this
method for a given set of data will produce the same cost formula
 A table has to be prepared where the occupancy and power
consumption data for the 6th month period will be totaled, multiplied
and squared (consumption).

Month (n) Occupancy (X) Power Consumption (Y) X² XY

January 20 45,000 400 900,000
February 30 55,000 900 1,650,000
March 28 52,000 784 1,456,000
April 26 51,000 676 1,326,000
May 35 65,000 1,225 2,275,000
June 32 61,000 1,024 1,952,000
Bulacan Date Developed:
Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 15 of 18
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Total 6 171 329,000 5,009 9,559,000
Equations (1) ⅀𝐗𝐘 = 𝐚(⅀𝐗) + 𝐛(⅀X²)
(2) ⅀𝐘 = 𝐧𝐚 + 𝐛(⅀𝐗)
Where X = measure of volume
Y = mixed cost
XY = total cost
⅀ = signifies summation
a = fixed cost
b = variable cost per unit
n = number of observations
substituting (1) 9,559,000 = 171a + 5,009b
(2) 329,000 = 6a + 171b
Multiplying equation (1) by 6 and equation (2) by 171, we arrive at equations (3)
and (4) as follows:
(3) 57,354,000 = 1,026a + 30,054b
(4) 56,259,000 = 1,026a + 29,241b
Subtracting (4) from (3), we get
b = 1,095,000 / 813 = 1,346.8634
Solving for a, using the value of b in equation (2):
a = 98,686.36 / 6 = 16,447.73
If 40 rooms are occupied, the total power consumption will be:
16,447.73 + 40(1,346.8634) = 70,322.27

STATEMENT OF COST OF GOODS MANUFACTURED (COGM) & SOLD (COGS)

COGM consists of the cost of direct materials, direct labor, and
manufacturing overhead associated with manufactured units that have
been completed during the current accounting period.
Cost of Goods Manufactured = Beginning work in process inventory +
Direct materials used + Direct labor + Manufacturing overhead – Ending
Work in process inventory
COGS consists of the product cost associated with goods sold during the
current accounting period
COGS = Beginning Finished goods inventory + COGM – Ending Finished
goods inventory

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 16 of 18
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Managerial Accounting
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 Figure 1-Example of COGM
Cost of Goods Sold
Beginning Finished Goods Inventory $2,000,000
Add: Cost of Goods Manufactured 1,398,000
Cost of Goods Available for Sale $3,398,000
Less: Ending Finished Goods Inventory 1,000,000
Cost of Goods Sold $2,398,000

Income Statement
Sales xxx
Less: Sales Discount xxx
Sales Returns & Allowances xxx xxx
Net Sales xxx
Less: Cost of Goods Sold xxx
Gross Profit/Gross Margin xxx
Less: Operating Expenses
Salaries, Wages, Advertising xxx
Net Income Before Interest & Taxes xxx
Less: Interest Expense xxx
Net Income Before Tax xxx
Less: Income Tax (30%) xxx
Net Income After Income Tax xxx

Bulacan Date Developed:

Bachelor of Science in February 2021
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 Figure 2-Flow of Cost in a Manufacturing Firm

Bulacan Date Developed:

Bachelor of Science in February 2021
Office Management Polytechnic Date Revised: Page 18 of 18
College
Managerial Accounting
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