ACTA 3 5. Involves varied assignments.

BASIC CONCEPTS IN MANAGEMENT ACCOUNTING; COSTS AND COST CONCEPTS 6. Engagements are usually non-recurring.
7. Engagements require highly qualified staff.
Management Accounting 8. Human relations play a vital role in each engagement.
It is the process of identifying, measuring, accumulating, analyzing, preparing,
interpreting, and communicating information that helps managers fulfill organizational Management Accounting Financial Accounting
objectives. Internal Users: officers and External Users: stockholders,
Users of Report managers creditors, concerned
Management Accountant government agencies
It is a person who provides financial data and advice to a company for use in the To provide internal users with To provide external users with
organization and development of its business. information that may be used information about the
Purpose by managers in carrying out organization’s financial position
Functions/Objectives of Management Accounting the functions of planning, and results of operations.
The basic function of management accounting is to assist management in performing controlling, decision-making,
its functions effectively. The functions of management are planning, organizing, and and performance evaluation.
controlling. It also provides information that may be used by management for decision Different types of reports, Primarily financial statements
making. such as budgets, financial and the accompanying notes to
Types of Reports projections, cost analyses, such statements.
Management Functions and The Need for Management Accounting Information etc., depending on the specific
1. Planning – involves: needs of management.
I. setting of immediate, as well as long-range goals for the organization; Reports are based on a Reports are based almost
II. predicting future conditions that are expected to prevail; Basis of Reports combination of historical, exclusively on historical data.
III. considering the different means or strategies by which the goals set may be estimated, and projected
achieved; and data.
IV. deciding which of the strategies should be used to attain such goals. In preparing reports, the Reports are prepared in
2. Directing and Motivating – involves overseeing the day-to-day activities, seeing to management of a company accordance with generally
it that the organization is functioning smoothly and the members of the Standards of can set rules to produce accepted accounting principles
organization are mobilized to carry out plans. Presentation information most relevant to and other pronouncements of
3. Controlling – involves checking the performance of activities against the plan or its specific needs. authoritative accounting
standards set and deciding what corrective actions to take should there be any bodies.
deviation between the actual and planned/standard performance. Focus of reports is on the Financial reports relate to the
Reporting Entity company’s value chain, such business as a whole.
 All the aforementioned management functions involve decision making. In as a business segment,
performing the decision-making function, managers need information. Such product- line, supplier, or
information is provided by management accountants. customer.
Reports may cover any time Reports usually cover a year,
Management Advisory Services (also called management consulting services, business period – year, quarter, month, quarter, or month.
advisory services, management services) Period Covered week, day, etc. Reports may
It refers to that area of accounting work concerned with providing advice and technical be required as frequently as
assistance to help clients improve the use of their resources to achieve their goals. needed.
Inherent Helps management make Revolves around cot
Characteristics of MAS Meaning effective decisions about the computation, cost control and
1. Services are rendered for the management rather than for third parties. business. cost reduction.
2. Involves problem solving. Offers a big picture of how Prevents the business from
3. Relates to the future. Application management should incurring costs beyond the
4. Broad in scope. strategize. budget.
 Measuring Grid Quantitative and qualitative Quantitative
Subset Vast in itself. One of the many subsets of Cost
management accounting. It is a measurement, in monetary terms, of the amount of resources used for some
Basis of Decision Historic and predictive Historic information purpose. When notified by a term that defines the purpose, cost becomes operational,
Making information e.g., selling cost, acquisition cost, variable cost, etc.
Statutory Audit has no statutory Statutory audit is required for
Requirement requirement. big businesses. Classification of Costs
Dependent on both cost Not dependent on  As to Function – manufacturing; selling and administrative
Dependence accounting and financial management accounting to be  As to Elements – materials, labor, factory overhead; all examples of selling and
accounting for successful successfully implemented. administrative costs.
implementation.
Users Management only Management, Alternative Classifications
shareholders,
and vendors  Business Function – Research and Development, Design of Products and Processes,
Production, Marketing, Distribution, Customer Service.
Controller: The Chief Management Accountant  Assignment to Cost Object – Direct Cost, Indirect Cost.
It is the chief management accounting executive of an organization who is mainly  Behavior Pattern in Relation to Activity or Volume - Variable, Fixed, Mixed Costs.
responsible for the accounting aspects of management planning and control.  Aggregate or Average – Total Cost, Unit Cost
 Assets or Expense - Inventoriable Cost or Product Cost, Period Cost
Functions of the Controller
1. Planning for Control – to establish, coordinate, and administer, as an integral part Cost Pool
of management, an adequate plan for the control of operations. It is an account in which a variety of similar costs are accumulated prior to allocation to
2. Reporting and Interpreting – to compare performance with operating plans and cost objects. It is a group of costs associated with an activity.
standards and to report and interpret results of operations to the concerned users Example: Overhead account
of such reports.
3. Evaluating and Consulting – to consult with all levels of management responsible Cost Object
for policy or action concerning any phase of the operation of the business as it It is the intermediate and final disposition of cost pools.
relates to the attainment of objectives and effectiveness of policies, organizational Example: Product, Job, Process
structures, and procedures.
4. Tax Administration – to establish and administer tax policies and procedures. Cost Driver
5. Government Reporting – to supervise or coordinate the preparation of reports to It is a factor that causes a change in the cost pool for a particular activity. It is used as a
government agencies. basis for cost allocation; any factor or activity that has a direct cause-effect
6. Protection of Assets – to assure protection for the assets of business through relationship.
internal control, internal auditing, and assuring proper insurance coverage.
7. Economic Appraisal – to continuously appraise economic and social forces and Activity
government influences and to interpret their effect upon the business. It is any event, action, transaction, or work sequence that incurs costs when producing
a product or providing a service.
Controllership Treasurership
Cost Behavior
1. Planning and control 1. Provision of capital
It describes how a cost behaves or changes as the amount of cost driver changes.
2. Reporting and interpreting 2. Investor relations
3. Evaluating and consulting 3. Short-term financing Types of Costs as to Behavior
4. Tax administration 4. Banking and custody 1. Fixed Cost
5. Government reporting 5. Credit and collections  In total: constant within the relevant range as activity output changes;
6. Protection of assets 6. Investments  Per unit: changes as activity level changes
7. Economic appraisal 7. Insurance 2. Variable Cost
 In Total: varies in direct proportion to changes in activity output;
  Per Unit: remains constant
3. Mixed Cost – has both fixed and variable components.
Cost Behavior Assumptions
1. Relevant Range Assumption - Relevant range refers to the band of activity within
which the identified cost behavior patterns are valid. Any level of activity outside
this range may have a different cost behavior pattern.
2. Time Period Assumption - The cost behavior patterns identified are true only over
a specified period of time. Beyond this, the cost may show a different behavior.

Correlation Analysis
 Correlation – measure of the co-variation between the dependent and
independent variables.
 Coefficient of Correlation (denoted by r) – measure of the extent of the linear
relationship between two variables.
 Coefficient of Determination (denoted by r2)
It is computed by squaring the value of r. It represents the percentage of the
total variation in the dependent variable y that is explained or accounted for by the
regression equation.
A very high r2 means that the values in the regression equation explain
virtually the entire amount of the total cost. The variables are highly correlated,
i.e., the cost driver selected is highly related to the dependent cost.

Segregation of Fixed and Variable Elements of Mixed Costs

1. High-Low Points Method – the fixed and variable elements of the mixed costs are
computed from two data points (periods)—the high and low periods as to activity
level or cost driver.
2. Statistical Scatter Graph Method – various costs (the dependent variable) are
plotted on a vertical line (y-axis) and measurement figures (cost drivers or activity
levels) are plotted on a horizontal line (x-axis). A straight line is drawn through the
points and, using this line, the rate of variability and the fixed cost are computed.
3. Method of Least Squares (Regression Analysis) – mathematically determines a line
of best fit or a linear regression line through a set of plotted points so that the sum
of the squared deviations of each actual plotted point from the point directly
above or below it on the regression line is at minimum. This method uses the
following equations in computing for the values of unit variable cost and fixed cost:
 Equation 1: ∑Y = na + b∑x
 Equation 2: ∑xy = a∑x + b∑x2

Cost Formula: y = a + bx
Where:
 “y” denotes total cost. It is called the dependent variable because it is dependent
on the value of another variable, the activity level x.
 “a” is an estimate of the fixed cost.
 “b” is an estimate of the variable cost per unit of activity.
 d. Utility charges that include a minimum-use fee, for a small business
e. Annual business licensing fee paid by a daycare center
1. Consider the descriptors that follow. f. Truck fuel consumed by a road construction company

a. Is heavily involved with the recordkeeping and reporting of assets, liabilities, Required: Classify each of these costs as variable, committed fixed, discretionary fixed,
and stockholders' equity. or semi-variable.
b. Focuses on planning, decision making, directing, and control.
c. Is heavily regulated. 4. Which of the following costs are variable, fixed, or mixed costs?
d. A field that is becoming more "cross-functional" in nature.
e. Much of the field is based on costs and benefits. Units of Output 20,000 Units 35,000 Units
f. Is involved almost exclusively with past transactions and events. Direct Materials ₱ 120,000 ₱ 210,000
g. Much of the information provided is directed toward stockholders, financial Worker’s Wages 400,000 700,000
analysts, creditors, and other external parties. Supervisor’s Salaries 250,000 250,000
h. Tends to focus more on subunits within an entity rather than the organization Equipment Depreciation 80,000 80,000
as a whole. Maintenance 65,280 88,320
i. May become involved with measures of customer satisfaction, and the Utilities 345,600 475,200
amount of actual cost incurred vs. budgeted targets. Total ₱ 1,260,880 ₱ 1,803,520

Required: Determine whether the descriptors are most closely associated with financial
accounting or managerial accounting.

2. Roles Of Controller and Treasurer Classify the following functions as

belonging either to a controller or a treasurer:
a. Creating financial strategies
b. Preparation of annual budget
c. Creating funding proposals
d. Compiling the cost of production 5. A company wants to analyze its cost behavior. It has determined that machine
e. Controlling stocks and fixed assets hours best explain the company's utilities cost. The company's relevant range of
f. Maintaining relationships with financial institutions activity varies from a low of 600 machine hours to a high of 1,100 machine hours,
g. Planning and control with the following data being available for the first seven months of the year:
h. Provision of capital
i. Credit and collections Month Utilities Machine Hours
j. Tax administration January ₱8,700 800
k. Short-term financing February 3,050 300
March 8,950 810
l. Government reporting
April 9,360 920
m. Investor relations
May 9,625 950
n. Protection of assets June 9,150 900
o. Reporting and interpreting July 8,360 720

3. Consider the six costs that follow. Required:

1) Using the high and low points method, develop the cost formula for the
a. Advertising and promotion costs of a do-it-yourself retailer company’s utility costs.
b. Surgical supplies used in a hospital's operating room 2) Using the method of least squares, develop the cost formula for the
c. Aircraft depreciation charges of an airline company’s utility costs.
 7. Mina Corporation extracts ore for eight different companies in Benguet. The firm
anticipates variable costs of ₱65 per ton along with annual fixed overhead of
₱840,000, which is incurred evenly throughout the year. These costs exclude the
following semi variable costs, which are expected to total the amounts shown for
the high and low points of ore extraction activity:

March (850 tons) ₱39,900

August (1,300 tons) ₱46,200

Mina uses the high-low method to analyze cost behavior.

Required:
a. Calculate the semi variable cost for an upcoming month when 875 tons will be
extracted.
b. Calculate the total cost for that same month.
6. The method of least squares was used to develop a cost equation to predict the c. Mina uses Cortez Trucking to haul extracted ore. Cortez's monthly charges are
cost of maintenance. Monthly data for the past four years were used for the as follows:
regression. 800 – 1,099 tons ₱70,000
1,100 – 1,399 tons 90,000
The following computer output was received: 1,400+ tons 110,000
Intercept ₱4,000 1) From a cost behavior perspective, what type of cost is this?
Slope 15 2) If Mina plans to extract 875 tons, is the company being very "cost effective"
Coefficient of correlation 0.94 with respect to Cortez's billing rates? Briefly discuss.
The driver used was “number of maintenance hours.”

Required:
1) What is the cost formula?
2) Using the cost formula, predict the cost of maintenance if 420 maintenance
hours are to be worked next month.
3) What percentage of the variability in maintenance cost is explained by number
of maintenance hours? Do you think the equation will predict well? Why or
why not?
4) Using the results from the regression equation, predict the cost of
maintenance for next year if 6,000 maintenance hours are predicted.
8. Theena Company wants to determine the factors that are associated with 9. The chief statistician of Xander Company has developed the following cost
overhead. The controller for Theena constructed a multiple regression equation formula:
using the following independent variables: direct labor hours, number of setups,
and number of purchase orders. The analysis was run using the past 30 months of Y = ₱200,000 + 5L + 20M
data. From the printout, the following data were obtained:
Where: Y = total monthly manufacturing overhead cost
Parameter Estimate L = labor hours
Intercept ₱50,000 M = machine hours
Rates of variability:
Direct labor hours (H) ₱10 The measure of goodness of fit is good and no evidence of multicollinearity exists.
Number of setups (S) ₱200 The company will use 5,000 labor hours and 3,000 machine hours next month.
Number of purchase orders (P) ₱50
Number of observations (n) ₱30 Required:
1) Determine the total manufacturing overhead costs that Xander Company
r2 = 0.95 should incur next month.
2) Xander makes a product that has ₱50 in materials costs. It requires four hours
Required: of labor time and 2 hours of machine time. Laborers earn ₱80 per hour. What
1) Write out the cost formula for monthly overhead for Theena Company. is the product’s per unit variable manufacturing cost?
2) If Theena budgets the following for next month, what is the budgeted 3) Suppose that Xander Company could reduce the labor time for the product
overhead cost? described in requirement 2 by 50%. Machine time will remain the same. By
 Direct labor hours 300 how much would the per unit variable manufacturing cost fall?
 Number of setups 40
 Number of purchase orders 90
3) Suppose that Theena’s engineers expect the number of purchase orders to
increase by 20 percent. How much additional overhead cost would be incurred
for the following month?