Managerial Accounting

Lec.1
Dr/ Marwa Abd Ellah
 Managerial accounting
Chapter 1
• The phase of accounting concerned with
providing information to managers for use in
planning and controlling operations and in
decision making.
• The accounting system includes subsystems such
as: financial accounting, cost accounting and
managerial accounting.
• The following table shows the differences
between financial accounting and managerial
accounting:
 Managerial accounting

Financial ACC. 6- Difference Managerial Acc.

External Users Internal
GAPP/ IFRS Standard Don't follow
Mandatory Requirements Not Mandatory
Whole company Subject Segment
Historical Time focus Future
Precision & Information Relevant &
verifiability characteristics timeliness
Cost terms , concepts and classifications

Cost is a optional sacrifice with

economic resources to get benefits
either at present or in the future
Cost terms , concepts and classifications
Cost can be divided into two main
categories; capital cost and operating
or current cost. The capital cost refers
to expenditures incurred to earn long
term fixed assets such as land,
buildings and equipment to be used in
the production of goods or the
rendering of services.
 Cost terms , concepts and classifications
Operating costs is the running costs of the
operations that are required to make
income, these costs are needed to produce
and sell the products or give the services of
the company; the current operating costs
are consumed during one year.
 Cost terms , concepts and classifications
• Example:
 Cost terms , concepts and classifications
The current operating costs can be classified
into several categories as follows:
1. Material, labor and services:- material
includes raw material costs, labor includes
salaries and wages and services include other
costs such as rent, maintenance, insurance,
advertising, light ... etc.
Cost terms , concepts and classifications
2-Manufacturing (production) costs, marketing
(selling) costs and administrative costs.
• Manufacturing cost is called product cost; it is
allocated to the produced units, it may be
transferred to the next period through
inventory.
• Marketing and administrative costs are called
period cost; they are allocated to the period
and must not be transferred to the next
period.
Cost terms , concepts and classifications
• Example:
 Cost terms , concepts and classifications

3. Direct costs (direct material and direct labor)

and indirect costs (overhead).
• Direct cost includes items that can be traced
and allocated to specific product.
• Indirect cost include items that couldn't be
traced and allocated to specific product, such
as rent, fuel, light ... etc. Indirect cost allocated
to products through traditional approach (cost
centers) or ABC approach.
 Cost terms , concepts and classifications
4. Variable costs and fixed costs.
• Variable cost: the total variable cost change with the
change of volume of production, such as raw
material.
• Fixed cost: includes items that will not change with
change in volume of production, such as rent.
• Sometimes there is a mixed cost which includes two
parts; the first part is variable cost and the other is
fixed cost such as maintenance cost which includes
fixed regular maintenance cost and variable
maintenance cost which depends on the machine
running hours.
Cost terms , concepts and classifications
5. Cash costs and non-cash costs.
• The cash costs represent every cost or expenses
must be paid in cash (sooner or later) such as
salaries, wages, raw material, light and so on, but
non-cash costs or expenses means any amount of
money will not be paid in cash such as
depreciation expense or provisions.
6. Other types of costs:
• there are other cost concepts that can be used in
managerial accounting such as relevant cost and
irrelevant cost, sunk cost, avoidable and unavoidable
cost... etc.
Cost terms , concepts and classifications
• For purposes of valuing inventories
and determining expenses for the
balance sheet and income
statement, costs are classified as
either product costs or period costs.
• Product costs are assigned to
inventories and are considered
assets until the products are sold.
Cost terms , concepts and classifications
• At the point of sale, product costs
become cost of goods sold on the
income statement. In contrast,
following the usual accrual practices,
period costs are taken directly to the
income statement as expenses in the
period in which they are incurred.
Cost terms , concepts and classifications
• The product costs consist of all manufacturing
costs, while selling and administrative costs
are considered to be period costs.
• For purposes of predicting cost behavior -how
costs will react to changes in activity-
managers often classify costs into two
categories-variable cost and fixed cost.
Cost terms , concepts and classifications
• Variable costs, in total, are strictly
proportional to activity. Thus, the
variable cost per unit is constant.
• Fixed costs, in total, remain at the
same level for changes in activity
that occurs within the relevant
range.
• Thus, the average fixed cost per unit
decreases as the number of units
increases.
 Rules
1- Total variable cost = variable cost per unit * no.
of units
2- Variable cost per unit = total variable cost/ no.
of units
3- Total fixed cost = Constant
4- Fixed cost per unit = Total fixed cost/ no. of units
5- Total cost= Total variable cost + Total fixed cost
6- Cost per unit = Total cost/ no. of units
 Examples of cost behavior:
Example 1:
In 2008 ABC Company produced 2000
units.
The variable cost per unit = $5
The fixed cost per unit = $3
In 2019 the company plans to
produce 3000 units
Compute the total cost and cost per
unit for 2019.
 Examples of cost behavior:
• Solution:
Variable cost = 3000 × 5- 15000
Fixed cost = the same for 2008 =2000 ×
3=6000
Total cost = 15000 + 6000 = 21000
Cost per unit = 21000 ÷ 3000 units = 7
• Remark:
The cost per unit decrease from 8 to 7
when the production increases from
2000 units to 3000 units.
 Examples of cost behavior:
• Example 2
Units produced in 2008 = 5000
Total variable cost = $ 40000
Total fixed cost = $ 20000
The production will be 4000 units in
2009 & will be 6000 units in 2010.
Compute the total cost and cost per
unit for 2009 , 2010
 Examples of cost behavior:
• Solution:
Variable ( 40000 ÷ 5000 ) = 8 × 4000 = 32000
Fixed = fixed for 2008 = 20000
Total cost 32000 + 20000 = 52000
Cost per unit 2009 = 52000 ÷ 4000 =13
In 2010 the production will be 6000 units, compute
the total cost and cost per unit
Variable cost = 6000 x 8= 48000
Fixed cost =20000 Total cost 48000 + 20000= 68000
Cost per unit 2010 =68000÷6000=11.3
 Examples of cost behavior:
• For purposes of assigning costs to
cost objects such as products or
departments, costs are classified
as direct or indirect. Direct costs
can be conveniently traced to the
cost objects. Indirect costs cannot
be conveniently traced to cost
objects.
 Examples of cost behavior:
• For purposes of making decisions, the
concepts of differential cost and
revenue, opportunity cost, and sunk
cost are of vital importance.
• Differential cost and revenue are the
cost and revenue items that differ
between alternatives. Opportunity cost
is the benefit that is forgone when one
alternative is selected over another.
Sunk cost is a cost that occurred in the
past and cannot be altered.
 Examples of cost behavior:
• Differential cost and opportunity cost
should be carefully considered in decisions.
Sunk cost is always irrelevant in decisions
and should be ignored.
• These various cost classifications are
different ways of looking at costs.
• A particular cost, such as the cost of cheese
in a taco served at Taco Bell, could be a
manufacturing cost, a product cost, a
variable cost, a direct cost, and a differential
cost - all at the same time.
 Cost behavior: analysis and use
• The ability to predict how costs will
respond to changes in activity is
critical for making decisions and for
other major management functions.
• Three major classifications of costs
were discussed - variable, fixed, and
mixed.
• Mixed costs consist of a mixture of
variable and fixed elements.
 Cost behavior: analysis and use
• Managers use costs organized by
behavior as a basis for many
decisions. To facilitate this use, the
income statement can be prepared
in a contribution format. The
contribution format classifies costs
on the income statement by cost
behavior ( i.e., variable versus fixed )
rather than by the functions of
production administration , and sales
Cost - Volume - Profit Relationships ( CVP )
• Break - even analysis
• CVP analysis involves finding the most favorable
combination of variable costs, fixed costs, selling
price, sales volume, and mix of products sold. Trade
- offs is possible between types of costs, as well as
between costs and selling price, and between
selling price and sales volume. Sometimes these
trade - offs are desirable, and sometimes they are
not. CVP analysis provides the manager with a
powerful tool for identifying those courses of
action that will improve profitability.
• Break - even point = fixed cost ÷ contribution
margin
• contribution margin ( CM ) = price - variable cost
per unit
 Example 3
Expected sales 10000 units
variable cost per unit 20
variable selling cost per unit 1
fixed manufacturing cost 300000
fixed selling cost 140000
selling price unit 80
Required
Prepare the net income by Financial accounting
method and Managerial accounting method
 Example
Expected sales 200000 units
variable cost per unit 40
variable selling cost per unit 2
fixed manufacturing cost 600000
fixed selling cost 280000
selling price unit 80
Required
Prepare the net income by Financial accounting
method and Managerial accounting method
 Example 4
Company estimated its unit cost of sales 12000 and
sales price 50 per unit
variable cost per unit 15
variable selling cost per unit 3
fixed manufacturing cost per unit 6
fixed selling cost per unit 4
total cost 80
Required
Prepare the net income by Financial accounting
method and Managerial accounting method
 Mixed cost
• Mixed cost
Y=a + b x
Y= Total mixed cost
A= Total fixed cost
B= Variable cost per unit
X= The level of activity
Variable cost per unit= High cost – Low cost ÷
High level – Low level
EX.1
Management believes that utility cost is a mixed cost that
depends on machine hours
Months Machine hour Utility cost
Jan 4,711 $ 34,799

Feb 4,780 $ 35,138

March 4,704 $ 34,762
April 4,768 $ 35,094
May 4,723 $ 34,872
June 4,721 $ 34,840
July 4,759 $ 35,053
Aug 4,730 $ 34,918
September 4,720 $ 34,834
1. Compute The Variable Cost / Unit Of
The Activity.

2. Determine The Total Fixed Cost By

Using Either The Highest Activity Level
Or The Lowest Activity.

3. Estimate The New Mixed Cost Knowing

That The Planned Machine Hours For
October Are 750 Hours.
Cost - Volume - Profit Relationships ( CVP )
• Example:
Variable cost per unit $ 20 - sales price $ 30
Total fixed cost $ 20000
Break - even volume = 20000 ÷ ( 30 - 20 ) =
20000 ÷ 10 = 2000 units
Sales that achieve target profit = ( fixed
cost + profit ) ÷ contribution margin
If the target profit is 24000
Sales that achieve target profit = ( 20000 +
24000 ) ÷ ( 30-20 )
= 44000 ÷ 10 = 4400 units
Cost - Volume - Profit Relationships ( CVP )
• Example 2:
Total fixed cost $ 48000 ) - price $ 10- variable cost
per unit $ 6
• Required :
1. Compute break - even volume and value
2. Compute volume that make $ 24000
• Solution :
break - even volume = 48000 / ( 10-6 ) = 48000 / 4 =
12000 units
break - even value = 12000 units * price 10 = $
120000
Compute volume that make $ 24000 = ( 48000 +
24000 ) / 4 = 18000 units
Cost - Volume - Profit Relationships ( CVP )
Dr/ Marwa Abd Ellah
Course Name: Managerial Accounting
Course Code: AAB 401

Level: 4th Level – English Dep, Accounting

Academic Year: 1st Semester, 2024-2025

Section 1
Introduction to Managerial Accounting

First: Theoretical Framework

1. What is Managerial Accounting?

Provide Information Managers Planning

control
decision making

2. Accounting systems and its subsystems.

Financial accounting Cost accounting Managerial accounting

3. Difference between financial accounting & managerial accounting.

Financial Acc. Differences Managerial Acc.
External Users Internal
GAPP/ IFR Standard Don't follow
Mandatory Requirements Not Mandatory
Whole company Subject to Segment
Historical Time focus Future
Precise & verifiable Information characteristics Relevant & Timeliness

➢ Relevant data: only data that meet the users needs and help in the decision
making and achieving objectives.
➢ Timeliness: means the availability of data when it’s needed (provide timely
information).
1|Page
Prepared by TA: Toqa Mustafa
 4. Cost terms, concepts, & classification.
Cost
scarified resources to get benefits at present or at the future.

Capital cost Current operating cost

• Expenditures incurred to earn long • Costs are needed to produce and
term fixed assets. sell the products or provide the
• To be used in the production of company services.
goods or the rendering of services. • Consumed for 1 year.

CURRENT OPERATING COSTS can be classified into:

Services (rent,
Material (raw material) Labor (wages)
maintenance, depreciation)

Product cost (Manufacturing) Period cost (non-manufacturing)

• Incurred to produce units and will • Marketing, selling, and
be allocated to it. administrative costs.
• Can be transferred to the next • Can’t be transferred to the next
period through inventory. period.

Direct cost Indirect cost

• Can be traced and allocated to • Can’t be traced and allocated to
specific product, such as DM & DL. specific product, such as overhead.

Variable cost Fixed cost

• Changes with the level of • Doesn’t Change with the level of
production. production.
There is a mixed cost that includes VC and FC.

Cash costs Non-cash costs

Every cost or expenses is paid in cash Will not be paid in cash such as
(sooner or later). depreciation expense.

TV Cost VC\ Unit TF Cost FC\ Unit

When the total level of production varies:
Varies constant constant Varies

2|Page
Prepared by TA: Toqa Mustafa
Second: The practical aspect

(A) General rules of cost:

1. Total cost = Total variable cost + Total fixed cost TC = TVC + TFC
2. Cost per unit = Total cost / no. of units c/u = TC /n. of units
3. Total fixed cost = constant
4. Fixed cost per unit = Total fixed cost / no. of units FC/u = TFC/n. of units
5. Variable cost per unit = total variable cost/ no. of units v/u = TvC/n. of
units
6. Total variable cost = variable cost per unit * no. of units TVC = VC/u*n. of units

Problem 1
ABC corporation reported the following data:
- Units produced in 2023 = 3000
- Total variable cost = $ 90000
- Total fixed cost = $ 25000
- The production will be 4000 units in 2024 & will be 8000 units in 2025.
Compute the total cost and cost per unit for 2024, 2025.

(B) Preparation of income statement from the financial & managerial prospective:

Preparation of income statement

Financial accounting approach Managerial accounting approach
Sales X Sales X
Less: C.G.S (manufacturing costs) (X) Less: Variable cost (X)
= Gross profit xx = Contribution margin xx
Less: Selling & administrative Ex. (X) Less: Fixed cost (X)
= Net income xx = Net income xx

3|Page
Prepared by TA: Toqa Mustafa
Problem 2
ABC corporation reported the following data:
- Expected sales 15,000 units
- variable cost per unit 25
- variable selling cost per unit 1
- fixed manufacturing cost 300,000
- fixed selling cost 140,000
- selling price unit 80
Required:
Prepare the net income by financial accounting method and managerial accounting
method.

4|Page
Prepared by TA: Toqa Mustafa