Managerial Accounting Basics

Managerial Accounting

• Managerial accounting reports are not for external users like investors and creditors, but for internal users
• The purpose of managerial accounting is to assist in decision-making within an organization
• Reports do not have to follow Generally Accepted Accounting Principles (GAAP).
• Planning, directing, and controlling are the three main management functions
• Setting objectives and determining strategies are part of the planning function
• Comparing actual results to planned objectives forms part of the controlling process
• A company's organizational chart shows the delegation of authority and responsibilities

Types of Businesses

• The three major types of businesses are service, merchandising, and manufacturing

Cost Terminology

• A cost driver is a factor that causes changes in costs
• Direct materials, direct labor, and manufacturing overhead are included in product costs
• Direct materials are included in product costs
• Raw materials for a product are a direct cost
• Manufacturing overhead includes indirect materials and indirect labor
• Factory rent is included in product cost
• Office salaries are not considered a product cost
• Depreciation on factory equipment is classified as a product cost
• Factory maintenance worker are an example of indirect labor
• Selling costs, administrative costs and period costs are different cost classifications
• Office salaries are not considered a period cost
• A cost object can either be a manufactured product or a service provided.

Cost Behavior and Analysis

• Fixed costs change in total based on production levels
• Variable cost remains unchanged per unit but varies in total
• A variable cost per remains the same regardless of production levels
• Total Cost = Fixed Cost + (Variable Cost per Unit × Activity Level)
• The break-even point is where total revenue equals total cost
• Opportunity cost the benefit foregone by choosing one alternative over another, not a cost that has already been incurred
• Money already spent on equipment that is no longer in use is an example of a sunk cost
• Sunk costs are not relevant in decision-making
• Relevant cost is used in short-term decision-making
• Discretionary costs are incurred based on a manager's decision and can be adjusted based on managerial decisions

Cost Estimation Methods

• The high-low method is used to separate mixed costs into fixed and variable components, calculating fixed and variable cost components of mixed costs
• Regression analysis is the approach used to estimate fixed and variable costs; it is the cost estimation method that provides the most accurate prediction of mixed costs
• The scatter diagram method is not more precise than regression analysis in cost estimation

Prime & Conversion Costs

• Prime costs consist of direct materials, direct labor
• Conversion costs include direct labor and factory overhead

Standard & Contribution Margin

• Standard cost is an estimated cost used for budgeting and performance evaluation
• Contribution margin is calculated as sales revenue minus variable costs

Explore the fundamentals of managerial accounting, which focuses on providing information to internal users for decision-making. Unlike financial accounting, it doesn't adhere to GAAP. Learn about planning, directing, controlling, types of businesses and related cost terminology.