Managerial Accounting

1
Managerial Accounting

• An Overview

2
Role in Decision-Making

• Provides economic and financial information to
  management
• Focus on resources, costs, profit and liquidity
  management
• Focus on short run performance

3
Management Functions

• 1. Planning
• Looking forward and establishing objectives
• Profit maximization versus utility?
• Market share maximization?
• Adding value to the business
• 2. Directing
• Implementation of objectives
• Coordinating activities and resources

4
Management Functions

• 3. Controlling
• Keeping activities on track
• Role of the CFO
• Managerial accounting
• Strategic planning

5
Vital Truths in Management

• The true cost and profit picture for each
  product, for each product/market segment, and for
  all key customers must always be known.
• A business must concentrate on cash flow and
  balance sheet strengths as much as profits.
• Quotes from article by Ames and Hlavacek in the
  Harvard Business Review

6
Common Foundation

• Different industries and businesses within
  industries often require different management
  accounting information
• However, the expected results are fundamentally
  the same.to more efficiently and effectively
  manage the business.

7
Understanding Performance

• Must be able to track the value added at each
  process and the costs associated with those
  processes,
• Must seek to avoid/minimize non-value added
  activities and their associated costs,
• Some managers dont want to know the results from
  accounting indicators,
• Some think that financial planning is all a bunch
  of funny money not real!!!

8
Managerial Cost Concepts

• Direct materials raw materials physically
  associated with the final product
• Direct labor employees physically and directly
  associated with the final product
• Overhead costs indirectly associated with the
  final product

9
More Concepts

• Period costs costs matched with revenue for a
  specific time period. (i.e., net income for a
  specific period (i.e., quarterly, annual).
• Product costs costs associated with producing
  the final product. Not considered an expense
  until the product (i.e., cost of goods sold).
• Total costs equals product costs (direct and
  indirect materials and labor) plus period costs
  (selling and administrative expenses).

10
Total Costs
Period Costs Non-manufacturing Costs
Production Costs Manufacturing Costs
Selling Expenses
Direct Materials
Direct Labor
Administrative Expenses

• Manufacturing
• Overhead
• Indirect materials
• Indirect labor
• Other indirect costs

11
Cost of Goods Sold Determination
Merchandising Firm
Beginning Merchandise Inventory
Cost of Goods Purchased
Ending Merchandise Inventory
Cost of Goods Available For Sale
-


Cost of Goods Sold
Manufacturing Firm
Beginning Finished Goods
Cost of Goods Manufactured
Ending Merchandise Inventory
Cost of Goods Available For Sale
-


12
Cost Accounting Concepts

• Process cost accounting
• Job order cost accounting
• Activity based cost accounting

13
Process Cost Accounting

• Tracking costs associated with a specific process
• Direct materials and labor
• Manufacturing overhead costs
• Assigning costs to finished goods

14
Process Costs in Making Bread
Raw Materials Factory Labor Manf. Overhead
Mixing Department
Baking Department
Packaging Department
Finished Goods
WIP
WIP
WIP
Production Cost Report
Production Cost Report
Production Cost Report
15
Job Order Cost Accounting

• Tracking costs associated with a specific order
  or job
• Direct materials and labor
• Manufacturing overhead costs
• Assigning costs to finished goods

16
Comparison of Cost Systems
17
Comparison of Cost Systems
18
Activity Based Cost Accounting

• An approach for allocating overhead
• An activity is any event, action, transaction or
  work sequence that incurs when producing a
  product or providing a service
• An activity cost pool is a distinct type of
  activity (e.g., ordering materials)
• A cost driver is any factor or activity that has
  a direct cause-effect relationship with resources
  consumed (e.g., machine hours)

19
Steps in ABC Accounting

• Identify and classify activities and allocate
  overhead to cost pools
• Identify cost drivers correlation between
  driver and use
• Compute overhead rates ABC rate
• Assign overhead costs to products use of cost
  drivers
• Comparison of unit costs across products

20
Activity Based Cost (ABC) System
Overhead Costs

Activity cost pools
Ordering and Receiving Materials Cost Pool
Setting Up Machines Cost Pool
Machining Cost Pool
Assembly Cost Pool
Inspecting and Testing Cost Pool
Painting Cost Pool
Cost drivers
of Tests
of Direct hours
of Machine hours
of Parts
of Purchase orders
of Setups
Products

21
Example of ABC Accounting
ABC Overhead rate Overhead per activity Cost
driver per activity Initial status Activity Cost
Pool Overhead Driver AB
overhead
activity
rate Setting up machines 300,000
1,500 setups 200/setup Machining 500,
000 50,000 hours
10/hour Inspecting 100,000 2,000
inspection 50/inspection
Total 900,000 Step 1 Assigning overhead
driver activity to products Activity Cost
Pool Cost driver Driver Product 1
Product 2 activity Setting up
machines setups 1,500
500 1,000 Machining Hours
50,000 30,000 20,000 Inspecting
inspections 2,000 500 1,500

22
Example of ABC Accounting
Step 1 Assigning overhead driver activity to
products Activity Cost Pool Cost driver
Driver Product 1 Product 2
activity Setting up machines setups
1,500 500 1,000 Machining
Hours 50,000 30,000
20,000 Inspecting inspections 2,000
500 1,500 Step 2 Partitioning of
overhead
Overhead Product 1
Product 2___ Setting up machines 300,000
(33) 100,000 (67) 200,000 Machining 500,000
(60) 300,000 (40) 200,000 Inspecting
100,000 (33) 25,000 (67)
75,000

33 500/1,500 and 100,000 500 units x
200/setup
23
Example of ABC Accounting
Step 1 Assigning overhead driver activity to
products Activity Cost Pool Cost driver
Driver Product 1 Product 2
activity Setting up machines setups
1,500 500 1,000 Machining
Hours 50,000 30,000
20,000 Inspecting inspections 2,000
500 1,500 Step 2 Partitioning of
overhead
Overhead Product 1
Product 2___ Setting up machines 300,000
(33) 100,000 (67) 200,000 Machining 500,000
(60) 300,000 (40) 200,000 Inspecting
100,000 (33) 25,000 (67)
75,000

67 1,000/1,500 and 200,000 1,000 x
200/setup
24
Example of ABC Accounting
Step 2 Partitioning of overhead
Overhead
Product 1 Product 2 Setting up machines 300,000
100,000 200,000 Machining 500,000
300,000 200,000 Inspecting 100,000
25,000 75,000 Total 900,000
425,000 475,000 Step 3 Overhead costs
per unit Units produced 25,000 5,000
Overhead cost per unit 17
95 Traditional overhead cost per unit 30
30 900,000 divided by 30,000 units

Avoids overstating profitability of some
enterprises and understating profitability of
others
25
Example of ABC Accounting
Product 1 Product 2 COP unit costs
with ABC costing Direct materials
40 30 Direct labor
12 12 ABC overhead
17 95 Total unit costs
69 137 COP unit costs with
traditional costing Direct materials
40 30 Direct labor
12 12 Traditional overhead
30 30 Total unit costs
82 72 900,000 divided
by 30,000 units
Traditional overhead costing suggests that
Product 2 is cheaper to produce than Product 1,
which is not true!
26
Another Approach
Product 1 Variable expenses Fixed expenses
Product 2 Variable expenses Fixed expenses
Product n Variable expenses Fixed expenses
..
1
2
1
2
1
2
2
1
Total fixed expenses

• Two approaches
• Allocate total fixed expenses using ABC
  accounting procedures
• Sum the budgeted fixed expenses at the product
  level and check for consistency at the firm
  level. Reallocate if necessary.

27
Decision-Making Concepts

• Cost behavior analysis
• Cost-volume-profit analysis
• Marginal analysis
• Pricing

28
Cost Behavior Analysis

• Variable costs costs that vary with the level of
  production
• Fixed costs costs that do not vary with the
  level of production
• Relevant range relevant segment of cost curves
• Mixed costs sometimes called semi-variable
  costs (e.g., rental rates)

29
Cost-Volume-Profit Analysis

• Contribution margin per unit unit selling price
  minus unit variable cost
• Contribution margin ratio units vs.
• Degree of operating leverage contribution margin
  net income
• Breakeven analysis entity vs. enterprise level

30
Marginal Analysis

• Short profit associated with input use
• Single versus multiple input usage
• Productivity and prices
• Product/enterprise selection

31
Product Pricing

• Target costing (TC P desired profit)
• Cost Plus pricing
• Cost plus a markup
• Markup percentage (desired ROI per unit divided
  by total unit cost)
• Variable cost pricing (excludes SR fixed costs)
• Internal pricing
• Cost-based transfer price
• Market-based transfer price
• Pricing power (Price takers vs. price setters)

32
Cash Management and LOC

• Identifying monthly cash flow surpluses and
  deficits
• Determining the required LOC maximum monthly
  cash flow deficit
• Remember, cash is King!!!