ACYMANS: Objectives, Role, and Scope of Management Accounting and Cost Terms, Concepts and Behavior

Planning

Involves establishing a basic strategy, selecting a course of action, and specifying how the action will be implemented.

Planning

It involves the following acts:

a. Setting immediate (short-term) and long-term objectives.

b. Determining the resources and tactics needed to achieve the plan.

c. Deciding which alternative is best suited to attain the set objectives.

Directing and Motivating

Involves mobilizing people to carry out plans and run routine operations.

Directing and Motivating

It involves the following acts:

a. Take action to implement the plan.

b. Motivate others to achieve results.

Controlling

Involves ensuring that the plan is actually carried out and is appropriately modified as circumstances change.

Controlling

It involves the following acts:

a. Comparing actual performance with set plans or standards.

b. Monitoring results to determine if the plan is being achieved.

c. Deciding what corrective actions to take should there by any deviation (variance) between actual and planned performance.

d. Adjusting future plans, if any.

Financial Accounting

Primarily for external users, such as investors and creditors.

Managerial Accounting

Exclusively for internal users, such as managers (or management) and employees.

Financial Accounting

It provides reports or information on financial statements; primarily monetary (financial) in nature.

Managerial Accounting

It provides monetary and non-monetary reports such as budgets, performance evaluation and cost reports.

Financial Accounting

It is guided by the Generally Accepted Accounting Principles (GAAP).

Managerial Accounting

It is guided by what the management wants and needs.

Financial Accounting

Its purpose is for financial reporting and compliance.

Managerial Accounting

Its purpose is for decision-making, planning, and control.

Financial Accounting

Its nature of information is objective, reliable, and historical.

Managerial Accounting

Its nature of information is subjective, relevant and future oriented.

Financial Accounting

Its time orientation is mainly historical (past) data.

Managerial Accounting

Its time orientation is future-oriented using current and past data.

Financial Accounting

Its unifying model is the: Assets = Liabilities + Equity

Managerial Accounting

It has no unifying model or equation.

Financial Accounting

Its frequency of reporting is prepared periodically (monthly, quarterly, annually),

Managerial Accounting

Its frequency of reporting is dependent on when it is needed by management, perhaps day-to-day or even in real time.

Financial Accounting

In terms of the level of detail, it focuses mainly on business as a whole.

Managerial Accounting

In terms of the level of detail, it is extensive and detailed.

Financial Accounting

In terms of necessity, it is mandatory (especially for public entities).

Managerial Accounting

In terms of necessity, it is discretionary or optional.

Financial Accounting

In terms of its source of data, it is from the company's internal information system.

Managerial Accounting

In terms of its source of data, it is from internal and external sources.

Cost Accounting

It is a subset of both management and financial accounting. This accounting system is utilized for internal reporting for use in management planning and control, and external reporting to the extent its product-costing function satisfies external reporting requirements.

Controllership

It is the process by which management assures itself that company resources are obtained and utilized according to plans that are in line with the company's set objectives. This is the practice of the established science of control.

Controller

An officer of an organization who has responsibility for the accounting aspect of management control. It is a title given to a person holding the position of chief management accounting executive of a business enterprise. This is often referred to as the chief accountant.

Controller

Governs the following:

a. Financial Accounting

b. Cost and Management Accounting

c. Government and Tax Reporting

d. Financial Analysis and Special Studies

Controller

Responsible for supervising the personnel in the accounting department and for preparing the information and reports used in both managerial and financial accounting.

Treasurer

Responsible for raising capital, safeguarding the organization's assets, management of its investments, credit policy and insurance coverage.

True

(True or False) A controller who is primarily concerned with accounting, must not hold at the same time the position of a treasurer, who is primarily concerned with the custody of funds.

Controller

Responsible for:

a. Planning and control

b. Reporting and interpreting

c. Evaluating and consulting

d. Tax administration

e. Government reporting

f. Economic appraisal

Treasurer

Responsible for:

a. Provision of capital

b. Investor relations

c. Short-term financing

d. Banking and custody

e. Credit and collections

f. Investments

g. Insurance

Internal Auditor

Is responsible for reviewing the accounting procedures, records and reports in both the controller's and treasurer's areas of responsibility. He expresses an opinion to top management regarding the effectiveness of the organization's accounting system. He may also make broad performance evaluations of middle and lower management.

Management by Objectives

A procedure in which a subordinate and a supervisor agree on (1) goals; and (2) methods of achieving them and develop a plan in accordance with that agreement. Afterwards, the subordinate is evaluated with reference to the agreed plan at the end of the period.

Management by Exception

A technique of highlighting those which vary significantly from plans and standards in line with the management principle that executive time should be spent on items that are non-routine and are identified as top priority.

Line Function

The authority to command or give orders to subordinates. It exercises direct downward authority over line departments. Managers in this position are directly involved in the provision of goods or services.

Staff Function

The authority to advise but not to command others; the function of providing line and staff managers with specialized service and technical advice for support. It is exercised laterally or upward. Managers in this position supervise activities that support the organization's overall mission, but they are only indirectly involved in operational activities. These include the general counsel, the executive VP for government relations and CFO, among others.

Controller

Primarily exercises a staff function as he gives advice and services to other departments and to the entire organization as a whole.

Cost

Is the monetary amount of the resources given up to attain some objective such as acquiring goods and services. When notified by a term that defines the purpose, it becomes operational.

Out of Pocket Costs

Involve an actual outlay of cash.

Marginal Costs

The sum of costs necessary to effect a one-unit increase in the activity level.

Opportunity Cost

The foregone benefit or lost opportunity of the path not taken.

Cost Drivers

A measure of activity, such as direct labor hours, machine hours, beds occupied, computer time used, flight hours, miles driven, or contracts, that is a causal factor in the incurrence of cost to an entity. It is a basis used to assign costs to costs objects.

Direct Costs

Are costs than can be easily and conveniently traced to a unit of product or other cost object.

Indirect Costs

Are costs that cannot be easily and conveniently traced to a unit of product or other cost object.

Common Costs

A cost incurred for the benefit of more than one cost object. It is synonymous to joint cost. These costs are incurred in the production of two or more inseparable products up to the point at which products become separable at the split-off point.

Controllable Costs

Costs that are likely to respond to the amount of attention devoted to them by a specified manager. These are the costs that can be affected by the efforts of a manager.

Committed Costs

Costs that are governed mainly by past decisions that have established the present levels of operating and organizational capacity and that only change slowly in response to small changes in capacity. These are the costs that are required as a result of past decisions.

Discretionary Costs

These are costs that management decides to incur in the current period to enable the company to achieve objectives other than the filling of orders placed by customers. These are the costs that are incurred in the current period at the "discretion" of management and are not required to fill orders by customers.

Manufacturing Costs

Include all costs incurred to produce the physical product.

Direct Materials

Major material inputs that can be physically and conveniently traced directly to the final product.

Direct Labor

The cost of labor that can be physically and conveniently traced to the final product.

Manufacturing Overhead

Includes all costs other than direct materials and direct labor that must be incurred to manufacture a product.

Nonmanufacturing Costs

All other costs incurred not related to the production of the physical product.

Marketing or Selling Costs

Costs necessary to get the order and deliver the product.

General and Administrative Costs

All executive, organizational and clerical costs.

Relevant Costs

Costs that have the potential to influence a decision. Costs that must differ between the decision alternatives. It also must have been incurred in the future rather than the past.

Sunk Costs

Cost incurred in the past that are not relevant for decision making.

Irrelevant Cost

Costs that will not influence a decision.

Variable Costs

Costs that change, in total, in direct proportion to changes in activity levels.

Total Variable Cost (TVC)

Increases as production increases.

Unit Variable Cost

Is constant regardless of production.

Fixed Costs

The costs that do not change in total regardless of the activity level, at least within some reasonable range of activity.

Total Fixed Costs

Remain constant as production increases.

Unit Fixed Cost

Decreases as production increases.

Mixed Costs

It contains a fixed portion that is incurred even when the facility is unused, and a variable portion that increases with usage.

Total Mixed Costs

Increases less proportionately, as opposed to total variable costs, as production increases.

Unit Mixed Costs

Decreases less proportionately, as opposed to fixed cost per unit, as production increases.

Linearity Assumption

An assumption that cost manifests a linear relationship over a relevant range despite its tendency to show otherwise over the long run.

Slope Formula

Y = a + bX

Y = Total Cost

a = Total Fixed Cost

b = Variable Cost per Unit

X = Number of Activity/Units

High Low Method

The fixed and variable elements of the mixed costs are computed from two sampled data points which are the highest and lowest points as to activity level or cost driver. The difference in cost divided by the difference in activity is the variable rate. Once the variable rate is found, the fixed portion is determinable.

High Low Method

It is a simple approach that uses the two most extreme data points to determine the slope of the line (variable cost per unit) and the intercept (total fixed cost).

Variable Cost per Activity (b)

Difference in Cost / Difference in Activity

Scatter Graph (Scatter Diagram) Method

All observed costs at various activity levels are plotted on a graph. Based on sound judgement, a regression line is then fitted to the plotted points to represent the line function. It provides a visual representation of the relationship between total cost (y) and activity level (x). It is a useful step in analyzing cost behavior because it helps determine the nature of the relationship and whether the linearity assumption is valid.

Least-Squares Regression Method

This is a statistical technique that investigates the association between dependent and independent variables. This method determines the line of best fit for a set of observations by minimizing the sum of the squares of the vertical deviations between actual points and the regression line.

Total Fixed Costs (a)

Σy-bΣx/n

n = Is the number of pairs of activities and total costs.

Σy = Is the sum of total costs of all data pairs.

Σx = Is the sum of the activities of all data pairs.

Σxy = Is the sum of the products activities of all data pairs.

Σx² = Is the sum of squares of activities of all data pairs.

Unit Variable Cost (b)

nΣxy-Σx*Σy/nΣx²-(Σx)²

n = Is the number of pairs of activities and total costs.

Σy = Is the sum of total costs of all data pairs.

Σx = Is the sum of the activities of all data pairs.

Σxy = Is the sum of the products activities of all data pairs.

Σx² = Is the sum of squares of activities of all data pairs.

Correlation Analysis

Is used to measure the strength of linear relationships between two or more variables. The correlation between two variables can be seen by drawing a scatter diagram:

a. If the points seem to form a straight line, there is a high correlation.

b. If the points form a random pattern, there is a low correlation or no correlation at all.

Coefficient of Correlation (r)

Means the relative strength of linear relationships between 2 variables. The range of the coefficient is from - 1 to + 1.

a. If r = - 1, there is a perfect inverse relationship between the activity and the cost.

b. If r = 0, there is no linear relationship.

c. If r = 1, there is perfect direct relationship between activity and the cost.