Management Accounting: Introduction

Chapter 1: Introduction to Management Accounting

• Management accounting is a decision-making process.
• The planning process involves identifying objectives and searching for alternatives.
• The control process involves comparing actual vs planned outcomes, and responding to divergencies from the plan.
• Successful companies provide customer satisfaction by focusing on: cost efficiency, quality control, time management, and innovation.
• Management accounting functions include allocating costs, providing manager decision support, and informing planning/performance measurement.
• Accounting identifies, measures, and communicates economic information for informed decisions.
• Internal users use management accounting for decision-making and external users use financial accounting.
• Financial accounting focuses on legal requirements, segments of the business, GAAP, past time dimension, and precision.
• Changing business environment impacts management accounting through globalization, product life cycles, tech advances, and digitalization.
• Benchmarking improves by measuring against top organizations.
• Cost accounting accumulates costs for inventory valuation, meeting external reporting and internal profit measurement needs.
• Stakeholders have interest in the organization, like managers, shareholders, employees, creditors, and government.

Chapter 2: Cost Terms and Concepts

• Cost object refers to anything measured separately.
• Cost allocation assigns costs to cost objects using surrogate measures.
• Direct costs can easily be traced to a product, while indirect costs (overhead) cannot, requiring allocation.
• Product costs are attached to products and included in inventory valuation only if they add value.
• Period costs are not attached to the product and included in the inventory valuation.
• Fixed costs remain constant regardless of activity level, while variable costs change proportionally with activity.
• Avoidable costs can be saved by not adopting options and unavoidable costs cannot be saved.
• Incremental costs represent additional costs/revenues from more production units, and marginal costs represent those from one additional unit.
• Balance sheets show financial conditions at a specific date, detailing assets, liabilities, and equity.
• Income statements show financial performance over a period, detailing revenues, costs, and profit.
• Product costs transfer into products (assets) and then COGS.
• Components of product costs are direct materials, direct labor, and manufacturing overhead.
• Period costs are expenses on the income statement.
• Operating leverage indicates risk.
• High fixed costs leads to higher risks and potential profits.
• Sunk costs are irrelevant for decision-making.
• Opportunity costs measure opportunities that are lost.
• Prime cost is the sum of direct materials and direct labor.
• Conversion cost is the sum of direct labor and manufacturing overhead.
• Semi-variable costs have both fixed and variable components.
• Cost information is needed for cost of goods sold and inventories allocation, for managers to make decisions, and planning/performance measurement.
• Differential (incremental) costs refer to the cost difference between alternative actions.

Chapter 3: Cost-Volume-Profit Analysis

• Over time, a business may need to lower price to continue selling its product(s).
• The linear cost-volume-profit model assumes constant variable costs and selling price.
• Cost should be fixed in the short term, but can be changed in the long term.
• Contribution is revenue less variable costs.
• Operating leverage is contribution margin divided by profit, used to measure how sensitive profits are to changes in sales.
• Revenue = variable cost + fixed cost at the break-even point.
• Profit volume ratio = contribution/sales revenue x 100%.
• Percentage margin of safety = (expected sales – break-even sales)/expected sales.
• CVP relies on some assumptions, such as all other variables remain constant with a constant sales mix.
• High low method can be used to calculate fixed and variable costs.
• CVP analysis examines the relationship between changes in activity and net profit.
• Contribution margin ratio is contribution divided by sales.
• Profit = (sales revenue x cm ratio) – fixed costs
• Margin of safety indicates how much sales can drop before a loss occurs.
• Higher margins → less risky activities.
• High fixed costs and lower variable costs will cause greater reduction in profits.
• Operating leverage measures the sensitivity of profits to sales changes.
• An operating leverage of 4 means profits change by 4 times more than sales; 10% change in sales causes 40% in profits.
• Decreasing returns to scale increases unit costs as volume increases.

Chapter 4: Measuring Relevant Costs and Revenues for Decision-Making

• Relevant (incremental/differentia) financial inputs are future cash flows differing between alternatives.
• Special selling price decisions consider one-time only orders at below-market prices, accepting short-term fixed costs.
• Product-mix decisions with capacity constraints should focus on products yielding the largest contribution per limiting factor.
• Depreciation is not relevant in Decisions on equipment replacement.
• Some fixed costs don't change in outsourcing.
• In discontinuation decisions, fixed costs should be assigned to other plants.
• Sunk costs are allocated and future costs that do not differ between the alternatives, cannot be altered
• Opportunity costs occur when financial benefits are sacrificed in the decision making process.
• Written-down value (book value) is the original cost of an asset, minus depreciation

Chapter 5: Pricing Decisions and Profitability Analysis

• Price takers have little control over prices
• Price setters have influence on prices.
• In short-run pricing, only the incremental cost of the order should be taken into account.
• One time orders should not affect future selling prices or expectations that orders occur regularly.
• Price setters can adopt activity-based costing (ABC) to allocate indirect costs appropriately.
• Pricing customized products can be done using cost-plus pricing
• Pricing can be done using target costing
• Product mix decisions need to be based on maximizing contribution per limiting factor.
• Sales revenue from a product must cover the resources committed to it.
• Cost-plus pricing determines the selling price based on different cost bases and mark-ups.
• Target mark-ups aim to contribute to non-assigned costs and profit, based on demand, product types and competitive positions.
• Cost plus pricing does not consider demand and may not ensure total sales revenue will exceed cost.
• Penetration pricing increases prices as market share increases.

Chapter 7: Cost Assignment

• Indirect costs have to be allocated with allocation bases or cost drivers
• Cause-and-effect allocations should use significant determinants to determine costs, and arbitrary allocations should not be used to determine costs.
• Manufacturing firms make cost assignments to product for inventory valuation, profit measurement, and decision-making.
• Absorption costing systems determine more accurate product costs with the use of inventory valuation and profit measurement.
• A plant-wide overhead rate needs to be justified with all products that consume departmental overheads within the same proportions.
• Use departmental rates when costs and products differ across departments.
• Cost centres/pools initially assign overhead costs in departments or smaller segments.
• Traditional systems use a 2 stage allocation process to establish departmental or cost centre overhead.
• Assign overheads to production and service cost centres, reallocate to production cost centres, compute separate overhead rate and assign costs.
• Actual overhead rates are not used because of delay & fluctuating rates.
• Under/over-recovery overhead is treated as period costs.
• Allocate only manufacturing overheads to products.
• Non-manufacturing costs should be assigned for decision-making.
• Activity-based costing assigns costs to activities.
• Allocation rate = total cost/cost drive activity
• Allocated cost = allocation rate x weight of the cost driver activity
• No indirect costs are present when only 1 product is produced

Chapter 8: Activity-Based Costing

• ABC allocates to activities, instead of departments.
• Traditional systems rely second stage on volume-based cost drivers, whereas ABC systems use many 2nd drivers.
• First stage of ABC consists of resource cost drivers and the second stage consists of activity cost drivers.
• Activity based management reorganizes to minimize activities used by a product.
• Identify activities, assign costs, determine cost drivers, finally assign costs to each of the products (ABC)
• Cost drivers need to be measurable for individual products
• Batch, product/service, and facility sustaining activities all form a hierarchy.
• Non-volume based cost drivers are used in ABC along with volume based cost drivers.
• Consumption ratios show the proportion of activity a product consumes
• Traditional systems rely too much on volume-based allocations, but ABC is not volume based

Chapter 9: The Budgeting Process

• The budgeting process plans, coordinates, communicates, and motivates managers to achieve organizational goals, and to control and evaluate.
• Budgeting is necessary to prepare data, determine factors, prepare the sales budget, have meetings, and review details.
• Activity-based budgeting authorizes resources to perform activities for budgeted sales volumes.
• ABB process uses reverse ABC.
• Budget focuses only on money.
• Sales leads to cash sales & sales on account.
• In regards to budgeting, corporate objectives relate to the organization as a whole and unit objectives relate to specific objectives of individual units.
• Budgeting implements the long-term plan but is detailed because it is for the year ahead
• ZBB creates budgets like programs are starting for the first time.
• ABC takes cost objects as the starting point, and then estimates what resources were required.
• Discretionary costs are at management's discretion to budget.
• Incremental budgeting adjusts the current budget for anticipated changes.

Chapter 10: Management Control Systems

• Management control systems use action, personnel, cultural, social, and results/output controls
• Results / output controls establish performance measures and targets, measure performance, and provide rewards/punishment
• MACS uses two elements: planning processes for expectations and also responsibility accounting.
• Responsibility accounting has four types: cost/expense, revenue, profit, and investment centres.
• Controllability principle controls expenses and accounts for managers.
• Feed-forward anticipates issues.
• Key terms are related to all aspects of this

Chapter 11: Standard Costing and Variance Analysis

• Standard costs are target costs for operations that can be built up to produce a product’s standard costs.
• A budget relates to overall costs, whereas variances relate to cost per unit.
• Standard costing is appropriate for production and for repetitive organizations.
• Analyze, report, investigate and take corrective action.
• Material price variance: (SP(standard price)-AP(actual price)) x AQ (actual quantity → quantity purchased!) = (SP-AP) x (AQ).
• Material usage variance: (SQ (standard quantity) – AQ) x SP = (SQ – AQ) x SP.
• Joint price/usage variance (SP – AP) x (AQ – SQ).
• Total material variance = SC - AC
• Sales margin price = (ASP (actual selling price) – SSP (standard selling price)) x ASV (actual sales volume)
• Sales margin volume = (ASV – BSV) x SM (standard contribution margin)
• "A" is negative/adverse, "F" is positive/favourable

Chapter 12: Divisional Financial Performance Measures

• Functional structure sees similar activities placed under departmental control.
• Divisionalized structures, divided between investment and profit, apply functional structure at a lower level
• Controllable profit measures a manager's profit performance.
• Divisional profit contribution can see the incremental short term contributions to profit.
• ROI can be manipulated by managers.
• The higher the RI, the better because RI is the controllable profit – the cost of capital charge.
• Financial measures = already happened in the past. The things you can still change as there is a delay between non-financial implications.
• Four main measures of divisional performance include return on investment (ROI) , Residual income (RI), and Economic Value added.

Chapter 14: Strategic Performance Management

• Strategic performance has three key objectives: strategies and plans adopted, level of performance, and rewards to employees
• Performance can be measured with a balanced scorecard with four main perspectives (customer, business, learning, financial)
• BSC seeks to link performance measures to an organization’s strategy
• BSC has leading and lagging measures.

Chapter 15: Strategic Cost Management and Value Creation

• Traditional management sees cost containment and routinely applied practices.
• Cost management sees cost reduction practices on an ad hoc basis.
• Value chain objective should be to make value chain activities effective and at a low cost, focus on each of the customer's point of view
• Large part of the costs are committed during the design of activities
• activity stages are used as a target.
• Activity Management uses three stages: identify major activities, assign costs, and determine cost drivers
• ABM works long term by improving process.
• BPR should improve costs through many points.
• Just-in-time is an example of BPR.
• quality is one of the cost points to consider.
• Kaizen costing has to do with incremental value over large points.

Chapter 16: Challenges for the Future

• An increasing emphasis is being placed on environmental/sustainability issues.
• Increasing awareness of ethics.
• Rise in intellectual capital and knowledge has led to some issues
• integrated reporting has lead to some issues between the two.