Introduction to Managerial Accounting PDF

BM1915 INTRODUCTION TO MANAGERIAL ACCOUNTING Definition and Objectives of Managerial Accounting Managerial accounting, also known as management accounting, is the p...

BM1915 INTRODUCTION TO MANAGERIAL ACCOUNTING Definition and Objectives of Managerial Accounting Managerial accounting, also known as management accounting, is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization’s goals. It is a field of accounting that provides financial information for managers and other internal users to make sound economic decisions. Managers make decisions during the day-to-day operations of the business, and managerial accounting provides information used for these decisions. To achieve the organization’s goals, it acquires resources (e.g., funds, equipment, buildings), hires people, and then engages in an organized set of activities. The day-to-day work of the management includes the following activities (Hilton & Platt, 2017): 1. Decision making 2. Planning 3. Directing operational activities 4. Controlling In this regard, managerial accounting is considered an integral part of the management process because knowing managerial accounting is not only for managerial accountants but also for managers, as they are all part of the management team. With the use of the tools of managerial accounting, the organization can achieve its goals effectively and efficiently. Objectives of Management Accounting Managers need information about the managerial activities enumerated above. That information comes from a variety of sources like economists, financial experts, marketing and production personnel, accountants, and the organization’s managerial accounting system. Managerial accounting systems supply all kinds of information to management in support of management’s role in directing the organization’s activities. Some examples of managerial accounting information which will be discussed are as follows: Classifying manufacturing and other costs and reporting them in the financial statements (cost concepts) Analyzing and interpreting financial statements with the use of different analytical techniques (financial statement analysis) Evaluating the impact of cost allocation on pricing products and services and allocating product costs using activity-based costing (activity-based costing) Estimating the behavior of costs for various levels of activity and assessing cost-volume-profit relationships (cost-volume-profit analysis) Evaluating performance using cost behavior relationships (product costing / variable costing) Evaluating special decision-making situations by comparing differential revenues and costs (differential cost analysis / relevant costing) Evaluating manufacturing costs by comparing actual with expected results (standard costing) Planning for the future by preparing budgets (short-term budgeting) Evaluating decentralized operations by comparing actual and budgeted costs as well as computing various measures of profitability (responsibility accounting, transfer pricing, pricing decisions) Evaluating alternative proposals for long term investments in fixed assets (capital budgeting). These sets of tools and perspectives add value to an organization by supporting the following major objectives of managerial accounting: 1. To provide information for decision making and planning 01 Handout 1 *Property of STI  [email protected] Page 1 of 11  BM1915 2. To assist managers in directing and controlling operational activities 3. To motivate managers and other employees toward the organization’s goals 4. To measure the performance of activities, subunits, managers, and other employees within the organization. 5. To assess the organization’s competitive position and work with other managers to ensure the organization’s long-run competitiveness in its industry. Management Accounting vs. Financial Accounting Accounting information should address three (3) different functions: 1. Estimating the cost of products or services (cost accounting) 2. Providing financial information to external users (financial accounting) 3. Providing information to management for decision-making (management accounting). Given the objectives of managerial accounting, it can be perceived that the focus in each of these objectives is on managers. Thus, managerial accounting focuses on the needs of the managers within the organization rather than the interested parties outside the organization (Hilton & Platt, 2017). On the other hand, financial accounting is a field of accounting that uses accounting information for reporting to parties outside the organization. There are many similarities between managerial accounting information and financial accounting information because they both draw upon data from an organization’s accounting system (a system of procedures, personnel, and computers used to accumulate and store financial data in the organization). One part of the overall accounting system is the cost accounting system that accumulates data about the costs of producing goods and services (Hilton & Platt, 2017). Cost accounting creates an overlap between financial accounting and managerial accounting. It integrates with financial accounting by providing product costing information for financial statements. Production cost data are also used in helping managers evaluate the pricing of different products and services (see Figure 1). Accounting System (one part of the organization’s management information system) Accumulates data for use in financial and managerial accounting Cost Accounting System (one part of the organization’s overall accounting system) Accumulates cost information Managerial Accounting Financial Accounting Information for decision making, Published financial statements and directing, planning, and controlling other financial reports an organization’s operations. Internal users of information External users of information Figure 1. Managerial accounting, cost accounting, and financial accounting Source: Managerial Accounting, 2017. p. 12 01 Handout 1 *Property of STI  [email protected] Page 2 of 11  BM1915 Managerial Accounting Financial Accounting Users of reports Managers and other internal users Shareholders, creditors, regulators and (within the organization) other external users (outside the organization) Purpose To provide internal users with To provide external users with information that may be used by information about the organization’s managers in carrying out the functions financial position and financial of planning, controlling, decision- performance making, and performance evaluation Focus of reports Reports often focus on sub-units or Financial reports focus on the business segments within the organization as a whole Types of reports Management reports (budgets, Financial statements financial projections, cost analyses, etc.) Regulation/Standards Optional and unregulated since it is Required and must conform to the of presentation only intended for management use generally accepted accounting Management can set its own rules in principles (GAAP), PFRS (Philippine producing information that is most Financial Reporting Standards), and relevant to its needs PAS (Philippine Accounting Standards) Period covered Reports may cover any period as Reports usually cover a year, quarter, required by the management or month Table 1. Comparison of managerial accounting and financial accounting Standard of Ethical Conduct for Management Accountants Management accountants are responsible for complying with and upholding the standards of competence, confidentiality, integrity, and credibility. Failure to comply may result in disciplinary action (Institute of Management Accountants, 2017). 1. Competence a. Maintain an appropriate level of professional leadership and expertise by enhancing knowledge and skills. b. Perform professional duties in accordance with relevant laws, regulations, and technical standards. c. Provide decision-support information and recommendations that are accurate, clear, concise, and timely. 2. Confidentiality a. Keep information confidential except when disclosure is authorized or legally required. b. Inform all relevant parties regarding the appropriate use of confidential information. Monitor to ensure compliance. c. Refrain from using confidential information for unethical or illegal advantage. 3. Integrity a. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts of interest. b. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. c. Abstain from engaging in or supporting any activity that might discredit the profession. d. Contribute to a positive ethical culture and place integrity of the profession above personal interests. 4. Credibility a. Communicate information fairly and objectively. 01 Handout 1 *Property of STI  [email protected] Page 3 of 11  BM1915 b. Provide all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. c. Report any delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law. d. Communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. Cost Concepts, Classification, and Segregation When notified by a term that defines the purpose, cost becomes operational (e.g., selling cost, variable cost, etc.). The point is that different cost concepts and classification are used for different purposes. There are many types of costs because these costs are classified differently based on the needs of the management. Definition of Terms Cost – It refers to a measurement, in monetary terms, of the amount of resources used for some purpose. Cost pool – It is an account in which a variety of similar costs are accumulated prior to allocation to cost objects. It is a group of costs associated with an activity (e.g., overhead account). Cost object – It is the intermediate and final disposition of cost pools (e.g., product, job, process). Cost driver – It is a factor that causes a change in the cost pool for a particular activity. It is used as a basis for cost allocation (any factor or activity that has a direct cause-effect relationship). Cost behavior – It describes how a cost behaves or changes as the amount of cost driver changes. Cost function – It is the formula to which the total cost of the firm will be computed. It is an algebraic equation used by managers to describe the relationship between a cost and its cost driver. Activity – It refers to any event, action, transaction, or work sequence that incurs costs when producing a product or providing a service. Relevant range – It is a range of activity that reflects the company’s normal operating range. Within the relevant range, the cost behavior is valid. Classification of Costs 1. As to traceability (assigning costs to cost objects) Direct cost – It is a cost that can be traced to a particular plant or department. Indirect cost – It is a cost that is not directly traceable to a particular department or sub-unit. 2. As to controllability Controllable cost – It is a cost that the manager can significantly or heavily influence its incurrence. For example, from the perspective of a department manager, controllable costs include salaries of supervisors, supplies, electricity, and other similar costs that are controllable by the said department manager. Uncontrollable cost – It is a cost that the manager cannot significantly or heavily influence its incurrence. Examples include allocated costs that are received from other segments or departments. 3. As to functional areas in the organization to which the costs relate Manufacturing cost – This is the cost incurred in the production of the product or service (converting raw materials into finished goods) and is composed of three (3) elements: o Direct materials – raw materials that become an integral part of, and is directly traceable to, the finished product o Direct labor – consists of labor costs that can be easily traced to individual units of product. o Manufacturing overhead – consists of manufacturing costs other than direct materials and direct labor 01 Handout 1 *Property of STI  [email protected] Page 4 of 11  BM1915 Prime cost = Direct materials + Direct labor Conversion cost = Direct labor + Manufacturing overhead Nonmanufacturing cost – This cost is incurred in administering the operations of the business and commercializing the product. It is commonly called operating expenses, which are charged to revenues for the period. o Selling costs – include all costs incurred to secure customer orders and get the finished product to the customer o Administrative costs – include all costs associated with the general management of an organization rather than with manufacturing or selling. 4. As to timing of charges to revenue in an accounting period (in preparing financial statements) Product cost – Also known as inventoriable cost, it is a cost assigned to goods or services until sold. Product costs “attach” to a unit as it is purchased or manufactured, and they stay attached to each unit of product as long as it remains in inventory awaiting sale. When goods are sold, it will be released from inventory as expenses (called cost of goods sold) matched against sales revenue. Period cost – This cost is matched against revenue in the time in which it is incurred. 5. As to relevance in decision making Differential cost – Also known as incremental costs, it is the amount by which the cost differs under two (2) alternative actions. Relevant cost – It is the cost incurred in one (1) alternative but will not be incurred in another alternative. As costs are incurred in both alternatives, such costs would be irrelevant in decision- making. Standard cost – It refers to the predetermined cost based on some reasonable basis such as past experiences, budgeted amounts, and industry standards. It is estimated based on actual capacity. Opportunity cost – It refers to the benefit forgone or given up when an alternative is chosen over the other/s. For instance, if a business decides to use its building for production rather than renting out to its tenants, the opportunity cost will be the rental income that would be earned had the business decide to rent out the building. Sunk costs – It refers to the historical costs that will not make any difference in making a decision. Examples include the acquisition cost of office equipment and the manufacturing costs of finished goods on hand. Out of pocket cost – It is a cost that requires the payment of cash or other assets in the future as a result of their incurrence. 6. As to cost behavior Variable cost – Within the relevant range and time period under consideration, it is a cost that changes, in total, directly proportional to changes in the level of activity (or cost driver). For example, if the level of activity increases by 15%, total variable costs will increase by 15%. If the level of activity decreases by 20%, total variable costs will also decrease by 20%. It may also be defined as a cost that remains constant per unit in every level of activity. 01 Handout 1 *Property of STI  [email protected] Page 5 of 11  BM1915 Total Variable Cost Line 150 Total cost (Pesos) 100 50 0 1 2 3 4 5 6 Volume of Production (Units) Figure 2. Total variable cost line ILLUSTRATION: ABC Expeditions is a small company that provides a daylong whitewater rafting excursion on the rivers of Palawan. The company provides all the necessary equipment and experienced tour guides and serves gourmet meals to its guests. The meals are purchased from a caterer for PHP 500 for a daylong excursion. The behavior of this variable cost is shown below: Number of guests Cost of meals per guest Total cost of meals 200 PHP 500 100,000 400 PHP 500 200,000 600 PHP 500 300,000 800 PHP 500 400,000 Variable cost 400,000 Total costs of meals (in pesos) 300,000 200,000 100,000 - 200 400 600 800 Number of guests Figure 3.Variable cost behavior Fixed cost – Within the relevant range and time period under consideration, the total amount is constant, but the per-unit amount varies inversely or indirectly as the level of activity (or cost driver) changes. o Committed fixed costs – It refers to the costs resulting from an organization’s structure or the use of its facilities. Examples include property taxes, salaries of management personnel, and cost of renting facilities. o Discretionary fixed costs – It refers to the costs resulting from a management decision to spend a particular amount of money for a specific purpose. Examples include the amount of money to spend on research and development, contributions to charitable institutions, and advertising. 01 Handout 1 *Property of STI  [email protected] Page 6 of 11  BM1915 Fixed Cost Line 15 Total cost (Pesos) 10 5 0 1 2 3 4 5 6 Volume of Production (Units) Figure 4. Fixed cost line ILLUSTRATION: To continue the ABC Expeditions example, assume the company rents a building for PHP 25,000 per month to store its equipment. The total amount of rent paid is the same regardless of the number of guests the company takes on its expeditions during any given month. The concept of fixed cost is shown graphically below. Fixed Cost Monthly rental cost (in 30,000.00 25,000.00 20,000.00 pesos) 15,000.00 10,000.00 5,000.00 - 200 400 600 800 Number of guests Figure 5. Fixed cost behavior Mixed Cost – This cost has both fixed and variable components. Examples include electricity, inter- department services, water and sewage, maintenance and repairs, and employer contributions to government agencies. Chart Title 30.00 20.00 10.00 - 1 2 3 4 5 Variable cost Fixed cost Figure 6. Mixed cost 01 Handout 1 *Property of STI  [email protected] Page 7 of 11  BM1915 Within the relevant range, the aforementioned cost behavior is valid. See the information below: Total amount Per cost driver Varies proportionately Variable cost Constant with the cost driver Varies inversely with the Fixed Cost Constant cost driver Here is a summary of the classification of costs: Purpose Cost Classification Examples Assigning costs to cost Direct (can be easily traced) Direct materials, direct labor objects Indirect (cannot be easily traced) Manufacturing overhead, indirect materials, indirect labor As to controllability Controllable cost The controllability of a cost is Uncontrollable cost dependent on the authority assigned to a specific manager. Accounting for costs in Manufacturing costs Direct materials, direct labor, manufacturing manufacturing/factory overhead companies Nonmanufacturing costs Selling costs, administrative costs, research and development As to timing of charges Product costs (inventoriable) Direct materials, direct labor, variable overhead, fixed overhead Period costs (expensed) Administrative expenses, selling expenses, distribution expenses Making decisions Differential cost (differs between Variable production costs (i.e., direct alternatives) materials, direct labor, variable overhead) and variable expenses Relevant cost In a decision to rent or construct an office building, the rent expense is a relevant cost from both alternatives Standard cost Assuming the planned or budgeted capacity is 5,000 units, the standard unit cost is PHP20, and the actual capacity is 6,000 units. The standard costs would be P120,000 (i.e., 6,000 x PHP20). Opportunity cost (benefit A company is evaluating whether to foregone) sell product A and earn PHP20,000 or sell product B and earn PHP25,000. If the company decides to sell product A, its opportunity cost is PHP25,000 because it is the potential income foregone for not selling product B. Sunk cost (should be ignored) Depreciation expense Out-of-pocket cost Salaries, rent, electricity, insurance 01 Handout 1 *Property of STI  [email protected] Page 8 of 11  BM1915 Purpose Cost Classification Examples Variable costs (proportional to Direct materials, direct labor, variable activity) manufacturing overhead (e.g., indirect materials, indirect labor, repairs, and supplies), variable selling expenses (e.g., sales commissions, and delivery expenses), and variable administrative expenses (e.g., general supplies, overtime costs, and Predicting cost behavior communications expenses) in response to changes in Fixed costs (constant in total) Committed fixed cost: rent, insurance, activity real property taxes Discretionary fixed cost: advertising expense, research and development expense Mixed costs (has variable and Electricity, inter-department services, fixed elements) water and sewage, maintenance and repairs, and employer contributions to government agencies. Table 2. Summary of cost classifications Analysis of Mixed Costs Classifying costs as to variable or fixed is very useful in planning and budgeting. The manager must be able to anticipate what will happen to these costs in case of changes in activity; if a cost is expected to change, the manager must know how much or up to what extent. Mixed cost is composed of the total variable costs and total fixed costs. However, the variable cost is measured on a per-unit basis and the total cost will vary depending on the level of activity. In this case, the firm must develop a cost function. 𝑌𝑌 = 𝑎𝑎 + 𝑏𝑏𝑏𝑏 Where: Y = total costs a = total fixed costs b = variable cost per unit x = level of activity or cost driver or the number of units produced ILLUSTRATION: Assuming for the month of January, ABC Expeditions had 500 guests who availed of the meals during the daylong excursions. The total cost could be determined at this level as: 𝑌𝑌 = 𝑎𝑎 + 𝑏𝑏𝑏𝑏 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝑃𝑃25,000 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑙𝑙𝑙𝑙 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 + 𝑃𝑃500(500 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔) = 𝑃𝑃25,000 + 𝑃𝑃250,000 = 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷, 𝟎𝟎𝟎𝟎𝟎𝟎 High-Low Method This is a cost segregation technique that is based on the premise that a change in costs is attributed to the change in variable cost—fixed cost being assumed to be constant. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level. 01 Handout 1 *Property of STI  [email protected] Page 9 of 11  BM1915 ILLUSTRATION: ABC Expeditions is preparing a flexible budget for next year and requires a breakdown of the maintenance cost into the fixed and variable components. The maintenance costs and machine hours are as follows: Maintenance costs Machine hours January P15,450 1,800 February 10,720 1,166 March 15,000 1,770 April 15,840 2,190 May 14,900 1,702 June 10,620 1,300 Using the high-low method of analysis, compute for the variable and fixed component. Step 1. Find the highest and lowest activities. Machine Hours and Maintenance Costs 20,000 2,500 15,000 2,000 1,500 10,000 1,000 5,000 500 0 0 January February March April May June Maintenance costs Machine hours Figure 7. Machine hours and maintenance costs Highest activity level April 2,190 machine hours Lowest activity level February 1,166 machine hours Note: It is the highest and lowest activity levels that need to be identified first rather than the highest/lowest cost. The number of hours (1,166) does not correspond to the lowest cost (P10,620). In this case, the cost driver or activity level prevails. Step 2. Calculate variable cost per unit. 𝐻𝐻𝐻𝐻𝐻𝐻ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 − 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 = 𝐻𝐻𝐻𝐻𝐻𝐻ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 − 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑃𝑃15,840 − 𝑃𝑃10,720 Variable cost per unit = 2190 − 1166 𝑃𝑃5,120 Variable cost per unit = 1,024 Variable cost per unit = 𝑷𝑷𝑷𝑷. 𝟎𝟎𝟎𝟎 01 Handout 1 *Property of STI  [email protected] Page 10 of 11  BM1915 Step 3. Calculate fixed cost. After computing for the variable cost per unit, calculate the fixed cost by subtracting the total variable cost at a specific activity level from the total cost at that activity level. 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐻𝐻𝐻𝐻𝐻𝐻ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 − 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 (𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙) or 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 − 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑝𝑝𝑝𝑝𝑝𝑝 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 (𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑙𝑙𝑙𝑙𝑙𝑙𝑒𝑒𝑙𝑙) High Low Total cost P15,840 P 10,720 Less: Total variable cost P5 x 2,190 hours 10,950 P5 x 1,166 hours 5,830 Monthly fixed cost P4,890 P4,890 To check using the cost function: 𝑌𝑌 = 𝑎𝑎 + 𝑏𝑏𝑏𝑏 𝑃𝑃15,840 = 𝑃𝑃4,890 + 𝑃𝑃5(2190) 𝑷𝑷𝑷𝑷𝑷𝑷, 𝟖𝟖𝟖𝟖𝟖𝟖 = 𝑷𝑷𝑷𝑷𝑷𝑷, 𝟖𝟖𝟖𝟖𝟖𝟖 or 𝑃𝑃10,720 = 𝑃𝑃4,890 + 𝑃𝑃5(1,166) 𝑷𝑷𝑷𝑷𝑷𝑷, 𝟕𝟕𝟕𝟕𝟕𝟕 = 𝑷𝑷𝑷𝑷𝑷𝑷, 𝟕𝟕𝟕𝟕𝟕𝟕 Step 4. Calculate the total variable cost for new activity. Multiply the variable cost per unit (Step 2) by the activity level to compute for the total variable cost for that month. Assuming the company will be consuming 1,500 machine hours for July, the computation will be as follows: 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 = 𝑏𝑏(𝑥𝑥) = 𝑃𝑃5(1,500) = 𝑷𝑷𝑷𝑷, 𝟓𝟓𝟓𝟓𝟓𝟓 Step 5. Calculate the total cost. Add the computed total variable cost (Step 4) to the total fixed cost (Step 3). Using the cost function, the total cost at 1,500 level is: 𝑌𝑌 = 𝑃𝑃4,890 + 𝑃𝑃5(1,500) = 𝑷𝑷𝑷𝑷𝑷𝑷, 𝟑𝟑𝟑𝟑𝟑𝟑 References: Hilton, R. W., & Platt, D. E. (2017). Managerial accounting: Creating value in a dynamic business environment (11th Ed.). 2 Penn Plaza, New York, NY: McGraw Hill Education. Institute of Management Accountants. (2017). IMA Statement of Ethical Professional Practice. Retrieved, November 14, 2019, from https://www.imanet.org/-/media/b6fbeeb74d964e6c9fe654c48456e61f.ashx Weygandt, Ph.D., CPA, J. J., Kimmel, Ph.D., CPA, P. D., Kieso, Ph.D., CPA, D. E., & Aly, Ph.D., I. M. (2018). Managerial accounting: Tools for business decision-making. Canada: John Wiley & Sons, Inc. 01 Handout 1 *Property of STI  [email protected] Page 11 of 11