Managerial Accounting PDF

MODULE 1: MANAGEMENT ACCOUNTING AND SCOPE WORK OF MANAGEMENT MANAGERIAL ACCOUNTING Managerial accounting is the practice of using accounting information - from revenues to production inputs and outputs...

MODULE 1: MANAGEMENT ACCOUNTING AND SCOPE WORK OF MANAGEMENT MANAGERIAL ACCOUNTING Managerial accounting is the practice of using accounting information - from revenues to production inputs and outputs affecting the supply chain – internally, in support of organization-wide efficiency and for tracking the organization’s progress toward attaining its stated goals Controller – highest accounting position in a firm ○ Management accountants produce reports for internal control ○ Reports are based on the needs of the management team of the company and are vital for the decision making of the company Planning Management accounting is not dependent upon the historical performance (?) There must be a blueprint ○ Historical = balance sheet There must be short-term and long-term plans ○ Management accounting is forward looking; future oriented Management accountants are asked to make a forecast Directing and Motivating ○ Ex. inflation rate ○ Historical performance is used as a reference to face the Directing – putting the plan into action; reaching the planned future outcomes ○ This can be done if the people are motivated Involves the presentation of financial information for internal purposes to ○ Motivate the people of the organization to reach these be used by management in making key business decisions goals Main goal of MC: provide financial information Key business decisions – that’s why MC is said to be for internal Controlling purposses Trying to measure the performance against the target Techniques used by managerial accountants are not idctated by Check whether the target has been reached or surpassed to control accounting standards, unlike financial accounting. the performance MC does not follow strictly the accounting principles Target not achieved ○ Control: review the action and perhaps revise it. 1  MANAGERIAL ACCOUNTING FINANCIAL ACCOUNTING LINE AND STAFF RELATIONSHIPS Line positions are directly related to achievement of te basic Accounting provides information Accounting provides information to objectives of an organization for managers of an organization stockholders, creditors, and others ○ Example: production supervisors in a manufacturing plant who direct and control its who are outside the organization Staff positions support and assist line positions operations ○ Example: cost accountants in teh manufacturing plant. Ex. financial countants ask managerial accountants to give them an THE CONTROLLER estimate/computation of how much the company shall use. DEPARTMENTS ○ Treasury department – has access to the cashier ○ Aaccounting department – headed by controller/comproller (highest accounting position in the company) ○ The chief accountant in an organization REPOSNIBILITIES ○ Financial planning and analysis ○ Const control ○ Financial reporting ○ Accounting informing systems Functions: ○ Analyze financial information and implement effective MANAGERIAL ACCOUNTING AND COST ACCOUNTING strategies ○ Budgeting and reporting COST ACCOUNTING ○ Advies strategic and business planning A management accounting process that involves recording, ○ Advisory to internala and external compant requirements analyzing, and reportig a company’s costs ○ Other auxiliary functions. ○ reports/accounts the company’s costs MANAGEMENT ACCOUNTANT IMPORTANCE: cost management is a form of management accounting that helps a business reduce the chance of going over The management accountant’s functions in an organization are: budget with more accurate forecasts of impending expenditure. ○ Analyze financial information and implement effective ○ Cost control – all costs must be within the budget made strategies before the year ○ Budgeting and reporting If you went over the budget; it is a big slash to the ○ Advises strategic and business planning income ○ Advisory to internal and external company requirements COST going over budget: ○ Other auxiliary functions ○ Perhaps you did not foresee the price hikes 2  Soft skills needed are: MANUFACTURING COSTS ○ Strong attention to detail ○ Organization skills The sum of costs of ll resources consumed in the process of making ○ Problem-solving skills a product ○ Critical and analytical skills Classified into three categories: ○ Communication skills DIRECT MATERIALS those that become an integral part of the product and that can be MODULE 2: MANAGEMENT ACCOUNTING AND SCOPE conveniently traced directly to it ○ Ex. a radio installed in an automobile COST definition COST is the amount of money spent to produce a product or good DIRECT LABOR Cost accounting is a form of management accounting that aims to labor costs that can be easily traced ot individual units of profits capture a company’s tootal cost of production by assessing all of ○ Ex. wage paid to automobile assembly workers its variable and fixed costs Cost is the monetary value of goods and services purchased by MANUFACTURING OVERHEAD producers and consumes manufacturing costs that cannot be traced directly to specific It does not strictly comply with the Accounting Standanrds unifts produced For internal use only Ex. indirect labor and indirect materials Cost accounting is one method a company can use to estimate ○ Indirect labor – wages pad to employees who are not hwo well the business is running directly involed in production work (ex. Maintenance Cost accounting looks to assess the different costs of a business workers, jabitors, security jobs) and how they impact operations, costs, efficiency, and profits ○ Indirect materials – materials used to support the Individually assessing a company’s cost structure allows production processs (ez. Lubricants and cleaning supplies management to improve hte way it runs its business and, therefore, used in automobile assembly plant) improve the value of the firm. MERCHANDISER AND MANUFACTURERS Merchandiser Manufacturers Buy goods in a finished Buy raw materials form Produce and sell finished Sell finished goods goods 3  NONMANUFACTURING COSTS Materials waiting to be processed Maketing and Selling costs ○ Work in process – currently Costs necessary to get the order and deliver the products being manufactured but Administrative costs not yet finished All executive, organizational, and clerical costs Partially complete products – some PRODUCT COST V PERIOD COST material, labor. Or overhead has been Product costs include direct added. materials, direct labor, and ○ Finished goods – to be sold manufacturing overhead Completed products awaiting sale. INCOME STATEMENT Period costs are not included in product costs. They areexpensed Cost of goods sold for manufacturers differs only slightly from cost on the income statement of goods sold for merchandisers BALANCE SHEET Merchandiser Manufacturers Current assets Current assets Cash Cash Receivables Receivables Prepaid expenses Prepaid expenses Merchandise Inventories inventory ○ Raw materials – used to make the finished goods 4  INVENTORY FLOW PRODUCTION COSTS: A CLOSER LOOK Whatever will be the ending balance in the previous period will be the beginning balance in the current period 5  Variable cost per unit – the cost per long distance minute talked is constant ○ Ex. 10 cents per minute FIXED COSTS Total Fixed cost – remain unchanged when activity changes. ○ Your monthly basic telephone bill probably does not change when you make more local calls Fixed Cost per unit – the average cost per local call decreases as VARIABLE V FIXED COSTS more local calls are made COST CLASSIFICATIONS FOR PREDICTING COST BEHAVIOR HOW A COST WILL REACT TO CHANGES IN THE LEVEL OF BUSINESS ACTIVITY BEHAVIOR OF COST (WITHIN THE RELEVANT RANGE) VARIABLE COSTS COST IN TOTAL PER UNIT Total Variable cost – change when activity changes VARIABLE changes as remains the same ○ our total long distance telephone bill is based on how many activity level DP over wide ranges CONSTANT minutes you talk changes of activity FIXED Remains the Goes down as same even when CONSTANT activity level goes IV the activity level up changes 6  DIRECT AND INDIRECT COSTS SUNK COSTS Cannot be changed by any decision. They are not differential costs DIRECT COSTS INDIRECT COSTS and should be ignored when making decisions. EXAMPLE: Costs that can be easily and Costs cannot be easily and ○ You bought an automobile that costs $10,000 two years conveniently traced to a unit of conveniently traced to a unit of ago. The $10,000 cost is sunk because whether you drive it, production or other cost objective product or other cost object. park it, trade it, or sell it, you cannot change the $10,000 Ex. direct materials nd Ex. indirect material and cost. direct labor indirect labor OTHER TYPES OF COSTS DIFFERENTIAL COSTS AND REVENUES Out-of-Pocket costs – cost you paid with your own money, whether or not it is reimbursed Costs and revenues that differ among alternatives Discretionary Costs/Avoidable Costs – costs or capital expenditures that can be curtailed or even eliminated in the short tmrw ihtout EXAMPLE: You have a job paying $1,500/month in your hometown. You having an immediate impact on the short-term profitability of a have a job offer in a neighboring city that pays $2,000/month. The business commuting cost to the city is $300/month ○ EX: advertising, maintenance, training R&D, etc. DIFFERENTIAL REVENUE: DIFFERENTIAL COST: Marginal costs – the cost to produce one additional unit of production $2k-$1,500 = $500 $300 Mixed Costs – cost that is a combination of fixed and variable costs Future Costs – costs that will be incurred in the future based on a NOTES: decision made. Every decision involves a choice from among at least two Irrelevant costs – a cost that will not change as the result of a alternatives. management decision Only those costs and benefits that differ among alternatives (i.e. ○ Ex. sunk cost, committed cost differential costs and benefits) are relevant in a decision Explicit Costs – actual costs incurred by the business that are ○ All other costs and benefits can and should be ignored. recorded and require a payment to be paid. Imputed or Notional Costs – is the cost allocated for resources or OPPORTUNITY COSTS use of a service that does not involve a cash outlay. The potential benefit that is given up when one alternative is Period Costs – A period cost is more closely associate with the selected over the other passage of time than with a transactional event EXAMPLE: Committed costs – project expenses that have been committed to in advance but hace not yet been paid or incurred ○ If you were not attending college, you could be earning $15,000/year. Your opportunity cost of attending college for ○ Ex: rental amount to be paid, fixed amount to be paid to one year is $15,000. employees. 7  3 types of income MODULE 3: BASIC TOOLS FOR FINANCIAL STATEMENT ○ Net income ANALYSIS ○ Net loss ○ Breakeven WHAT IS A FINANCIAL STATEMENT ends reports in accounting; basis of the owner to declare IMPORTANT REASONS FOR FINANCIAL STATEMENTS ANALYSIS bankruptcy To indicate the financial health of the company basis of the users to know the status of the company Financial health has a bearing upon the company’s ○ DIRECT USERS - users, government employees ○ Liquidity, Profitability, Growth, Solvency, Stability ○ INDIRECT USERS - advisors, regulatory agencies ○ Price earning ratio Present the summarized data of its assets, liabilities and equities in ○ Bond rating the balance sheet. ○ Cost of financing Present the summarized data of revenue and expense in the ○ Availability of financing income statement. To indicate areas requiring attention If not analyzed, may lead one to draw incorrect conclusion about the company’s financial condition. LIQUIDITY IMPORTANCE: ability to pay short term current liabilities ○ FOR THE MANAGEMENT ○ Sort term = due and demandable for 1 year or less It tells them what they need for their daily ex. Payroll, employee benefits, rent, taxes, treasury bills operations Current assets > current liabilities Must know assets and liabilities SOLVENT ○ FOR EMPLOYEES ability to pay long-term liabilities during CBA, asking for additional benefits ○ Long term = Due and demandable more than 1 year in the Management needs audited financial statements future ○ FOR THE PUBLIC Ex. bank loans, pension, bonds Can base on historical performance One may be solvent but not liquid, vice versa, or both PROFITABILITY NECESSARY STATEMENTS How much Return of Investment Before investing: INCOME STATEMENTS ○ Compare ROI with other businesses in the industry or shows the results of the operations of the company; depends on industry rate calendar/fiscal year ○ Check historical performance ○ For a single operating year ○ Check externalities fo the environment (ex. pandemic) 8  ex. Investing in a stock market Trend analysis STABILITY uses indexes and ratios to simplify the figures over years. Not baon sa utang Amount of percentage can be easily understood than expressing Accounting equation: ASSETS = Liabilities + Capital millions of pesos. ○ Una liabilities because of settlement preferences The amounts for the base year is always expressed in 100%. ○ Assets are arranged based on liquidity How can short-term investments be liquidate Debt-equity ratio ○ By pre-terminating it – ex. Investment is good for 1 year but can be pre-terminated in 3 months TWO TRADITIONAL TECHNIQUES OF FINANCIAL ANALYSIS Consequence: interest will only be 0.5% Both HA and VA are not the end of the process, examine the areas ○ Inventories become more liquid than supplies that indicate to be possible problem areas Inventories = raw materials, work in process, finished goods HORIZONTAL ANALYSIS In the Financial Statement: hiwalay Comparison of 2 or more accounting periods In the Balance Shet: sama sama Comparative analysis presents the differences in absolute amount and in percentage two ASSETS 2018 2019 2020 2021 or more accounting periods which are normally in years Cash 5,000,000 4,000,000 10,000,000 6,500,000 Formula: percentage of change = amount of change/base Receivables 3,000,000 7,500,000 8,000,000 3,500,000 ASSETS 2022 2023 DIFFERENCE % Short -Term 6,800,00 2,700,000 9,000,000 12,000,000 investments Cash 400,000 700,000 300,00 75% Inventories 11,500,000 3,000,000 2,000,000 1,000,000 Receivables 1,200,000 800,000 (400,000) (33.33%) Supplies 100,000 20,000 250,000 125,000 Short -Term 150,000 300,000 150,000 100% investments TOTAL 26,400,000 17,220,000 29,250,000 23,125,000 Inventories 350,000 200,000 (150,000) (42.86%) Supplies 60,000 20,000 (40,000) (66.67%) Convert to % 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑛 Prepayments 10,000 40,000 30,000 300% 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 TOTAL 2,270,000 2,060,000 9  ASSETS 2018 2019 2020 2021 BALANCE SHEET Cash 100 80 200 130 ASSETS LIABILITIES Current Assets Current Liabilities Receivables 100 250 267 117 Cash 800,000 Salaries Payable 700,000 Receivables 200,000 Utitlities Payable 100,000 Short -Term 100 40 132 176 Marketable Securities 100,000 Non-Current Liabilities investments Inventories 300,000 Mortgage Payable 2,000,000 Non-Current Assets Inventories 100 26 17 9 Long-term investments 600,000 Total Liabilities 3,000,000 Supplies 100 20 250 125 Fixed Assets 3,000,000 CAPITAL TOTAL ASSETS P5,000,000 Total Capital 2,200,000 VERTICAL ANALYSIS TOTAL LIBILITIES P5,000,000 Analysis with the same accounting period AND CAPITAL ○ Financial ratios measures the company profitability, liquidity, Convert to % growth and stability through the use of financial mix 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 ratios. 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑂𝑅 𝐿&𝐶 ○ Common size statements gets the proportion in percentage for all figures reported in the balance sheet and income ASSETS LIABILITIES statement Current Assets Current Liabilities Cash 800,000 16% Salaries Payable 700,000 14% a. Balance sheet – 100% base is the total assets Receivables 200,000 Utitlities Payable 100,000 2% b. Income statement – 100% base is the net sales 4% Non-Current Liabilities c. Cash flow statement – 100% base is the total cash Marketable Securities 100,000 2% Mortgage Payable 2,000,000 44% available for use Inventories 300,000 6% Non-Current Assets Total Liabilities 3,000,000 Long-term investments 600,000 12% Fixed Assets 3,000,000 60% CAPITAL Total Capital 2,200,000 TOTAL ASSETS P5,000,000 100% 40% TOTAL LIBILITIES P5,000,000 100% AND CAPITAL 10  INCOME STATEMENT Sales 1,000,000 100% Less: Cost of Goods Sold (450,000) (45%) Gross Profit 550,000 55% Less: Expenses Salaries Expense (40,000) (4%) Utility Expense (20,000) (2%) Gas Oil (30,000) (3%) Depreciation Expense (90,000) (9%) Bad Debt Expense (10,000) (10%) TOTAL EXPENSE (190,000) (19%) Net Income P360,000 36% Sales Discount – discount that entices people to buy the product Sales Returns – nabenta na, binalik pa USEFUL RATIOS WORKING CAPITAL = CURRENT ASETS-CURRENT LIABILITIES ○ Positive excess = liquid QUICK ASSETS – easy to liquidate ○ Cash, Receivables, STI ONLY ○ Aka Acid-Test Ratio 11