Managerial Accounting
Managerial Accounting:
Users: managers who plan and control an organization
Time Focus: Future emphasis
Emphasis on relevance
Emphasis on timelines
Subject: Focus on segment reports
Rules: Not bound by GAAP / IFRS or any prescribed format
Not mandatory
Planning
Establish Goals, Specify how goals will be achieved, and develop budgets
Controlling
The control function gathers feedback to ensure that plans are being followed
Feedback in the form of performance reports that compare the actual results with the budget is an essential part of the control function
Decision Making
Decision-making involves making a selection among competing alternatives
What should we be selling?
Who should we be serving?
How should we execute?
Accounting Majors
The IMA estimates that more than 80% of professional accountants in the U.S. work in non-public accounting environments
Employers expect accounting majors to have strong financial accounting skills, but they also expect application of the planning, controlling, and decision making skills that are the foundation of managerial accounting
Certified Management accountant CMA
To become a CMA requires membership in the Institute of Management Accountants, a bachelors degree from an accredited college, two continuous years of relevant professional experience, and passage of the CMA exam
1-17-25
Chapter 1
Managerial Accounting and Cost Concepts
Purpose of Cost classification
Assigning costs to cost objects
Accounting for costs in manufacturing companies
Preparing financial statements
Predicting cost behavior in response to changes in activity
Making decisions
Assigning costs to cost objects
Direct costs
Costs that can be easily and conveniently traced to a unit of product or other cost object
Examples of direct material and direct labor
Indirect costs
Costs that cannot be easily and conveniently traced to a unit of product or other cost object
Example manufacturing overhead
Common costs
Indirect costs are incurred to support a number of cost objects. These costs cannot be traced to any individual cost object
Classifications of manufacturing costs
Direct Materials
Direct materials are raw materials that become an integral part of the product and that can be conveniently traced directly to it
Example a radio installed in a car
If you’re making jackets, the zippers buttons fabric etc is the raw material.
Raw when they are in inventory, direct when they are being used to make product
Direct Labor
Direct labor costs are those labor costs that can easily traced to individual units of product
Example wages paid to automobile assembly workers
Manufacturing overhead
Manufacturing overhead includes all manufacturing costs except direct material and direct labor. These costs cannot be readily traced to finished products
Includes indirect materials and labor costs that cannot be easily or conveniently traced to specific units of product
Examples:
Depreciation of manufacturing equipment
Utility costs
Property taxes
Insurance premiums incurred to operate a manufacturing facility
Only those indirect costs associated with operating the factory ar included in manufacturing overhead
All of these make up the product cost
Prime costs and conversion costs
Manufacturing costs are often classified as follows
Direct materials and direct labor are prime cost
Direct labor and manufacturing overhead are conversion cost
Prime cost are the ones that start the product what you need to begin
Conversion is converting it into the final product
Labor costs is double counted, so adding prime and conversion together will not give product cost
Nonmanufacturing costs
1-24-25
Manufacturing costs (product costs)
Direct materials
Direct labor
Manufacturing overhead
Nonmanufacturing costs (period costs)
Selling expenses
Admin. Expenses
Cost flows of product costs
Raw materials > work in progress > finished goodxs > cost of goods sold (I/S)
Costs behavior
Variable (in total)
Fixed (in total)
Mixed = variable + fixed costs
Example: utility costs (manufacturing overhead): fixed monthly payment (fixed) + cost per KW (variable), Cars (fixed car payment, variable gas payment)
Mixed cost line = Y = a + bX
Y = total mixed cost
a= total fixed cost
b= variable cost per unit of activity (price per KW hour)
X = the level of activity (KW hours used)
If fixed utility monthly charge is $40, variable cost is $0.03 per KW hour, monthly activity is 2000 KW hours, what is utility bill? Y=$40+($0.03 x 2000) = $1000
Cost classifications used in decisions: determine relevant or irrelevant costs to the decision
Differential costs (or incremental costs) are the difference in cost between any alternatives
A difference in revenue between two alternatives is called differential revenue
Both are always relevant to decisions
Differential costs can either be fixed or variable
Opportunity cost
The potential benefit that is given up when one alternative is selected over another
These costs are not usually found in accounting records but must be explicitly considered in every decision
Sunk Costs
Sunk costs have already been incurred and cannot be changed now or in the future
These costs should be ignored when making decisions (sunk cost fallacy if not ignored)
Cost behaviors are only valid within the relevant range
In making decisions costs can be
Relevant:
Differential (incremental) costs or benefits (or revenues)
Opportunity costs
Irrelevant
Sunk costs
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1-27-25
Traditional income statement vs contribution income statement
Traditional: sales - cost of goods sold = gross margin - selling and admin expense = net operating income (or loss)
Used primarily for external reporting
Sales - variable expenses = contribution margin - fixed expenses = net operating income (or loss) 2,5 , 6 , 8 , 11
Used primarily by management
Example of something that is in variable expenses but not gross margin = fixed part of manufacturing overhead, this obviously isn't counted in variable expenses, but in fixed expenses later
Use of contribution format
Used as internal planning and decision making tool (Ch2)
Cost volume profit analysis (Ch4)
Segmented reporting of profit data (Ch6)
Special decisions such as pricing and make or buy analysis (Ch8)
Budgeting
Chapter 2 : CVP analysis (Cost volume profit relationships)
Key assumptions
The selling price is constant. The price of a product or service will not change as volume changes
Costs are linear and can be accurately divided into variable and fixed components. The variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range
In multiproduct companies, the mix of products sold remains constant
Basic of CVP analysis
A contribution income statement is helpful to managers in judging the impact of changes in selling price, cost, or volume on profits. The emphasis is on cost behavior
Contribution margin CM is the amount remaining from sales revenue after variable expenses have been deducted
CM is used first to cover fixed expenses. Any remaining CM contributes to net operating income
Sales, variable expenses, and contribution margin can also be expressed on a per-unit basis.
We do not need to prepare an income statement to estimate profits at a particular sales volume. Simply multiply the units sold above break even by the contribution margin per unit. If the company sells 430 units, break-even units 400, then its net operating income will be $6000 (30 units x $200/unit)
Profit = (Sales - Variable expenses) - Fixed expenses
When a company only has one product we can further refine this equation. Sales expanded to (Q)uantity sold x Selling (P)rice per unit = Sales (Q x P)
Variable expenses = (Q x V) v=variable expenses per unit
Profit = (P x Q - V x Q)
Unit CM = selling price per unit - variable costs per uniot = P - V
Profit = Unit CM (P-V) x Q - Fixed expenses
Relationships among revenue, cost, profit, and volume can be expressed by preparing a CVP graph.
Units on the bottom, dollars on left
Draw a line parallel to the volume axis to represent total fixed expenses
Choose some sales volume, and plot the point representing total expenses, Draw a line through the data point back to where the fixed expenses line intersects the dollar axis
Choose some sales volume, and plot the point representing total sales, draw a line through the data point back to the point of origin
Break-even is the intersection between total expenses and total sales
The profit area is above
The simpler form = only shows the profit line, called the profit graph. Profit = Unit CM x Q - Fixed costs
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1-29-25
Chapter 2 review
Cost - volume - profit analysis
Contribution margin income statement
Variable and fixed costs
Total contribution margin = revenue - total variable costs
Contribution margin covers total fixed expenses +profit
Unit C/M = price - variable costs per unit
Profit = (Unit CM x Quantity) - Fixed costs
Contribution margin ration (CM ratio) and the variable expense ratio
The contribution margin as a percentage of sales is referred to as the cm ratio.
CM ratio = CM / sales
For RBC the contribution margin ratio is 80,000/200,000 = 40%
For each $1, increase in sales results in a total contribution margin increase of 40 cents
CM ratio = CM per unit / selling price per unit
Variable expense ratio = variable expenses / sales
CM ratio = sales - variable expenses / sales
CM ratio = 1 - variable expense ratio
Variable expense ratio = 1 - CM ratio
Sales revenue = variable costs + contribution margin
Profit = (CM ratio x Sales) - Fixed expenses
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1-31-25
Review:
CM RATIO = CM / Sales (or Unit CM / Price)
Variable cost ratio = VC / Sales
CM ratio + VC ratio = 100% (sales)
Break Even Point
Break even point= where a company breaks even, where total sales = total expenses (0 profit)
Unit sales to break even = fixed expenses / CM per unit
Profit = unit cm x Q - Fixed expenses
Break-even analysis: Dollar sales using Equation method
Profit = CM ratio x Sales - Fixed expenses
Formula method
Dollar sales to break even = Fixed expenses / CM ratio
If it says units, use the unit ratio
Units to earn target profit = (target profit + fixed expenses) / Unit CM
Sales to earn target profit = (target profit + fixed expenses) / CM ratio
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2-3-25
CHAPTER 2 REVIEW
Break-even point in units = fixed expenses / Unit CM
Break-even in sales dollars = fixed expenses / CM ratio
To achieve a target profit in units & sales dollars = (target profit + fixed expenses) / Unit CM (or CM ratio)
Margin of safety
Degree of operating leverage
Break-even point for a multiproduct company
Cost - Volume - Profit analysis
Contribution margin income statement
Variabel costs
Fixed costs
Total contribution margin = revenue - total variable costs
Contribution margin covers total fixed expenses + profit
Unit C/M = price - variable costs per unit
Profit = (Unit CM x Quantity) - Fixed costs
CVP graph and profit graph
New material Chapter 2
Margin of safety: the excess of budgeted or actual sales dollars compared to break-even sales
Margin of safety = Actual sales - Break-even sales (ex: 250k - 200k = $50k)
To get % margin of safety = margin of safety / total actual sales (50k / 250k = 20%)
To get margin of safety in units = margin of safety / price per unit (50k / 500 = 100 units)
Cost structure refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization’s cost structure
There are advantages and disadvantages to high fixed cost or low variable cost, and low fixed cost or high variable cost srutructures
Advantage of a high fixed cost structure is that income will be higher in good years compared to companies with lower proportion of fixed costs
A disadvantage of high fixed-cost structures is that income will be lower in bad years compared to companies with lower proportion of fixed costs
Companies with low fixed-cost structures enjoy greater stability in income across good and bad years
Degree of operating leverage = contribution margin / net operating income
Measure of how sensitive net operating income is to percentage change in sales. It is a measure at any given level of sales of how a percentage change in sales volume will affect profits
Definition of Sales Mix
Relative proportion in which a company’s products are sold
Different products have different selling prices, cost structures, and contribution margin
When a company sells more than once product break even analysis becomes even more complex
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2-5-25
Review
Margin of safety = total sales - BE sales
Break-even in sales dollars = fixed expenses / CM ratio
CM ratio = CM / sales
Degree of operating leverage = CM / Net Op Income
Break even point for a multiproduct company:
Total CM ratio to get BE sales as a company, then use sales mix to get BE sales for each product
% change in net operating income = Degree of operating leverage * % increase in unit sales
Mixed Costs
Mixed cost = both variable and fixed elements (ex: utility = variable cost per KW + fixed monthly charge)
Plot the data points on scattergraph (Total cost Y dependent variable, vs activity X independent variable)
Variable cost per hour is = change in cost divided by change in hours from the biggest to the smallest activity hours (ex: (9800-7400) / (850-450) = $6 / hour)
Variable cost per hour = change in cost / change in hours
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2-7-25
Chapter 2A review:
Scatter-graph - linear cost relationship?
Cost equation = Y = a + bX
Y = cost
A = fixed cost (intercept where line starts)
B = cost per activity hour (variable cost per unit of activity, slope)
X = hours of activity
High-low method:
Pick the highest and lowest activity levels
Variable cost per hour of maintenance is equal to the change in cost divided by the change in hours
Change in cost / change in activity = variable cost per hour of maintenance
Total fixed cost = total cost - total variable cost
Regression:
New
Least-squares regression method
Method used to analyze mixed costs if a scattergraph plot reveals an approximately
Excel can be used to estimate the intercept (fixed cost) and slope (variable cost per unit) that mibnimize the sum of the squared errors
Also provides a statistic called the R^2 (R squared) which is a measure of the goodness of fit of the regression line to the data points
EXAM 1
20 questions: 5 variable vs fixed cost (like in sample exam)
15 multiple choice question
7 just answer question
8 need calculation
Sample exam really helps
Bonus point question: look at first power point slides about purpose and how we use managerial accounting nd whats the difference between financial accounting
HW Questions and Answers
1
2
CostsProduct Cost or Period Cost
1. Depreciation on salespersons’ cars.Period Cost
2. Rent on equipment used in the factory. Product Cost
3. Lubricants used for machine maintenance.Product Cost
4. Salaries of personnel who work in the finished goods warehouse.Period Cost
5. Soap and paper towels used by factory workers at the end of a shift.Product Cost
6. Factory supervisors’ salaries.Product Cost
7. Heat, water, and power consumed in the factory.Product Cost
8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.)Period Cost
9. Advertising costs.Period Cost
10. Workers’ compensation insurance for factory employees.Product Cost
11. Depreciation on chairs and tables in the factory lunchroom.Product Cost
12. The wages of the receptionist in the administrative offices.Period Cost
13. Cost of leasing the corporate jet used by the company’s executives.Period Cost
14. The cost of renting rooms at a Florida resort for the annual sales conference.Period Cost
15. The cost of packaging the company’s product.Product Cost
Northeast Hospital’s Radiology Department is considering replacing an old inefficient X-ray machine with a state-of-the-art digital X-ray machine. The new machine would provide higher quality X-rays in less time and at a lower cost per X-ray. It would also require less power and would use a color laser printer to produce easily readable X-ray images. Instead of investing the funds in the new X-ray machine, the Laboratory Department is lobbying the hospital’s management to buy a new DNA analyzer
ItemCostExample: Cost of X-ray film used in the old machineDifferential Cost
1. Cost of the old X-ray machineSunk Cost
2. The salary of the head of the Radiology Department None
3. The salary of the head of the Laboratory Department None
4. Cost of the new digital X-ray machine Differential Cost
5. Rent on the space occupied by Radiology None
6. The cost of maintaining the old machine Differential Cost
7. Benefits from a new DNA analyzer Opportunity Cost
8. Cost of electricity to run the X-ray machines Differential Cost