MANAGEMENT ADVISORY SERVICES 1 4.

BASIS FOR DECISION MAKING – primary

MANAGEMENT ACCOUNTING – the process of tool of management in getting its job
accumulation, analysis, preparation, done
interpretation and communication of information CONTROLLER
used by management to plan, evacuate, and - control and deals with records,
control within an organization and to assure use systems and presence to attain the
of accountability for its resources. objectives of internal controls and
good managing.
MANAGEMENT FUNCTIONS - Head accountant of the company.
 PLANNING - Overlook accounting staff
- setting goals and objectives - Making sure records are maintained
- budgeting is involved and policies are adhered.
Goals – general CONTROLLERSHIP FUNCTIONS (PREGPET)
Objectives – specific 1. PLANNING AND CONTROLLING –
Example: budgeting
- goal - I want lose weight 2. REPORTING – financial reports, SFP, SES,
- objectives – I want to lose 10kg. SOCE
 DIRECTING – implementation of plans 3. EVALUATION – correcting, relevance of
 CONTROLLING – evaluation of reports
performance and if the plan is being 4. GOVERNMENT RELATIONS AND
achieved REPORTING – making sure they comply
* All leads to DECISION MAKING 5. PROTECTION OF ASSETS – assets are not
- DECISION MAKING – choosing the best abused
option to achieve goals and objectives. 6. ECONOMIC APPRAISAL
Consider the cost and be practical. 7. TAX ADMINISTRATION
OBJECTIVES OF MANAGEMENT ACCOUNTING TREASURER
INFORMATION (PGSB) - deals with the management of the
1. PROFIT MEASUREMENT – normally wealth of the organization as well as
measured in terms of profitability finances
2. STANDARDS FOR CONTROLLING – actions - make sure that the company has
made are to be made in accordance with enough cashflow for daily operation /
plan function / transaction / enforcement
3. GUIDE FOR PLANNING – ensure that BASIC FUNCTION
organizational resources and systems fit  CASH FLOW MANAGEMENT
with what is needed in the future
 - OPERATING – short term (credit and government and its internal to the
collection agencies organization
- INVESTING – noncurrent assets (PPE)
- FINANCING – long term loans 2. PURPOSE OF INFO
 RISK MANAGEMENT FINANCIAL ACCTG MANAGEMENT ACCTG
- INSURANCE Reports for general Reports for
DISTINCTION AMONG MANAGEMENT purposes management only
ACCOUNTING, COST ACCOUNTING AND
FINANCIAL ACCOUNTING 3. RESTRICTIONS
1. MANAGEMENT ACCOUNTING – provides FINANCIAL ACCTG MANAGEMENT ACCTG
financial and non-financial information to Regulated, restricted No regulations, does
an organization’s managers and other and often controlled not adhere to GAAP
internal decision makers. by GAAP; uses PFRS and does not use PFRS
2. COST ACCOUNTING - method for
determining the cost of a project, process 4. TIMELINESS
or thing FINANCIAL ACCTG MANAGEMENT ACCTG
3. FINANCIAL ACCOUNTING – the process of Often available only Available quickly
producing financial statement for external after audited without the need to
users. (complete), historical wait for an audit;
INTERNATIONAL CERTIFICATION IN in nature; focus on current and/or future
MANAGEMENT ACCOUNTING historical information oriented
- CPA – Certified Public Accountant with some predictions
- CMA – Certified Management Accountant
- CFM – Certified Financial Manager 5. SCOPE OF INFO
GAAP – Generally Accepted Accounting Principles FINANCIAL ACCTG MANAGEMENT ACCTG
IFRS – International Financial Reporting Standards Reports are holistic Reports are
PAS – Philippine Accounting Standards segmented
PFRS – Philippine Financial Reporting Standards 6. TYPE OF INFORMATION
IASB – International Accounting Standards Board FINANCIAL ACCTG MANAGEMENT ACCTG
FINANCIAL ACCOUNTING VS. MANAGEMENT Focuses in accounting Multi-disciplinary, also
ACCOUNTING and finance deals with other areas
1. USERS AND DECISION MAKERS of knowledge and
FINANCIAL ACCTG MANAGEMENT ACCTG disciplines
Shareholders, Managers, employees,
investors, creditors, and decision makers 7. OTHERS
 FINANCIAL ACCTG MANAGEMENT ACCTG Time used x Total amount of machine – hours in
Focuses on the Concerns with the the period was 7,200 hours.
process of preparing usefulness of financial 7,200 x 35.75 = 257,400 (Applied OH to Units)
the financial statement; timeliness OH – Overhead
statements and COST OF GOODS SOLD – expense in accounting
precision (cost of sales)
- Cost of goods that are either
MAS COMPUTATION NOTES: manufactures / purchased and then sold
ACTUAL FACTORY OVERHEAD (FOH) (Beg inventory + Cost of goods sold) – End
- Directly contributed Inventory = COGS
- True cost incurred and typically include UNDERAPPLIED / OVERAPPLIED FOH
things such as: indirect mas, indirect Actual FOH – Applied FOH = over/under applied
labor, factory supply used, factory FOH
insurance, factory depreciation, factory Overapplied = Applied > Actual
maintenance and repairs, factory taxes. Under Applied = Applied < Actual
- Any indirect costs related to completing CONTROLLABLE DIRECT FIXED COST – managers
the job or making a product can control easily; salaries
- Actual na naincur na cost sa period UNCONTROLLABLE DIRECT FIXED COST – can’t be
- Indirect factory costs avoided; depreciation
- Factory cost except DM, OL OTHER VARIABLE COST
- Hindi kasama sa production expense - Direct Materials
APPLIED FACTORY OVERHEAD (AFOH) - Direct Labor
- Used until all the actual costs are available - Factory Overhead – Indirect Cost
- Ongoing business expense not directly Direct Cost – Fixed cost & Variable Cost
attributed to creating a product or service Indirect Cost – not directly accountable to a cost
- Any costs that cannot be directly assigned subject; administration personnel, security
to a cost object: rent, admin staff COST CONCEPTS
compensation, insurance - “cost” – costs and expenses
- Fixed rate - In management – knowing their nature,
COST OBJECT behavior, and characteristics
- Product, product line, process, etc. Accountant's perspective
Example: CAPITAL EXPENDITURES
Biz apply FOH to its product based on standards - long-term investment such as machine,
FOH $35.75 / hour of machine and equipment. equipment
- Puhunan
 - Large amount of money and resources PRODUCT COST
investment - relates to the product (OM, DL, FOH)
- Long-term impact on business profitability - expenses in producing of product
- Converted to expense once their related - inventoriable and deferred as assets while
income has been generated the units are unsold
OPERATING EXPENDITURE * Prime Cost = DM + DL
- is expense (daily business expenses) ex: * Conversion Cost = DL + FOH
electric bill, utilities * Variable Production Cost = DM + DL +VFOH
- gastos; directly supports the normal PERIOD COST
business operations - relates to the period of incurrence
- expense when the statements of - expenses not on production account
profit/loss is presented - incurred to administer business, R&D,
* imminent recognition sell / distribute product, attend to
* associating cause and effect customer’s need
* rational and systematic association - expense when incurred
COSTS (cogs) AND EXPENSES (utilities)
- have benefits DIRECT PRODUCT COST
- relates to functional accounting of - Direct material and Direct Labor
business - Directly identified with the finished
* Cost of goods manufactures – incurred in goods / services
producing goods and services (DM, DL, FOH) - Directly attributable in the process of
* Cost of goods sold – relates to units that are making goods and services
already sold FACTORY OVERHEAD – indirect product cost
EXPENSES Manager’s Perspective
- incurred in distributing goods and RELEVANT COST – used in making decisions
managing a business Characteristics:
* Distribution Expenses – Marketing Promotions - Differential costs – vary from 2 alternative
* Administrative Expenses – systems & control. to another
Government compliance - Future costs – estimated quantification of
LOSSES the amount of a prospective expenditure
- have no benefits; bad debts, loss of sales, IRRELEVANT COST
loss of obsolescence - past cost, sunk cost, and historical cost.
- reduction of asset’s value without benefit Irrelevant in making decisions (not
to business leading to equity impairment relevant for decision making
(spoilage)
 - cost remain the same regardless of a - managed / influenced by a manager
choice to be made - manager’s decision making depends on
- cost are not to be incurred in the future scop, nature and extent of authority
- management deals about future NON CONTROLLABLE COST – outside of the
DIRECT SEGMENT/DEPARTMENTAL COST decision power or influence a given manager.
- directly identified with the department, PLANNED COST
process, segment or activity - future cost / estimated costs
- maybe variable / fixed cost - projected, estimated, budgeted, applied,
- avoided upon the cessation of business standard costs
unit operations * Projected cost – future value derived from using
- ex: dept manager, salary, supplies forecutting models (causal model & profitability,
purchase and use, rental of equipment, regression models
utilities * Estimated Cost – future values derived using
INDIRECT SEGMENT/DEPARTMENTAL COST standard quantities & prices as basis
- Allocated costs, common costs, or with * Applied Cost – estimated valued derived using
avoidable cost the normal costing system
- Not directly identifies with a department / * Standard Cost – reliable valued accepted by
business unit men from empirical, scientific and controllable
- Continuously persist despite business unit studies
ceases its operation ACTUAL COST – expenditure, already incurred
- Ex: salaries of executives, advertising. and recorded in the books
Systems review, interest expense * planned costs and actual cost difference is
AVOIDABLE COST planning gap or a planning variance
- can be prevented BUDGETED COST
- not incurred once an activity is not - expected to be incurred at the level of
performed activity used in preparing the master
- becomes savings – imputed cost budget
UNAVOIDABLE COST STANDARD COST
- remain to be incurred and constant - flexible budget
regardless of option - expected to be incurred at any level of
- remain constant, do not change, activity aside from that used in master
irrelevant in short term decision budget
- ex: rent, depreciation, interest, property, * Budgeted & Standard cost – use the same
taxes, unlimited fixed cost predetermined standard rates
CONTROLLABLE COST
* Capacity of variance – difference of Budgeted MARGINAL COST – marginal is per unit, increase
and standard in cost per unit
OUT OF POCKET COST - incurred and paid in cash DECREMENTAL COST – decreases in costs
NON CASH COST – not paid in cash VARIABLE COST
SUNK COST - change in total and is constant per unit
- not manageable (past cost) - change in total in direct proportion to
- represents commitments made by the changes in the level of production and
business in its previous decisions and sales but is constant on per-unit basis
cannot be avoided in the future FIXED COST
- constant, historical, and irrelevant in short - constant in total and varies inversely per
term decision unit
FUTURE COST - remain constant regardless of the change
- to be incurred in the upcoming periods in level of production and sales but
(estimated, planned, budgeted) inversely changes on a per unit basis
- relevant and value in making decisions * committed fixed cost – incurrence have been
- affect upcoming acts. committed by the business in the past by reason
Economist’s Perspective of contract, acquisition, or agreement
EXPLICIT COST * discretionary fixed costs – incurrence is assured
- intended to be incurred (budgeted) by the amount may change depending on the
- already recorded / to be recorded in discretion / value judgement of manager
books MIXED COST OR TOTAL COSTS – have variable
IMPLICIT COST and fixed cost components
- theoretical costs TC = FC + VC
- they are assumed, not recognized in FC & VC – expressed in their constant terms
books FC – total
- opportunity cost and imputed costs VC – per unit basis
OPPORTUNITY COST – given up SEPARATION OF THE FIXED & VARIABLE
IMPUTED COST COMPONENTS OF MIXED COST
- avoided 1. High low method
- not incurred but are implied in a given - traditional method of cost segregation
decision AKA “Range Analysis”
- ex: loan 5k with 15% interest or use own - assumption: any change in total cost is
money; 15% is the imputed cost if you attributable to the change in variable
chose to use your own money costs
INCREMENTAL COST – total increase in cost
 - in applicable when the relationship Total Cost = FC + (UCM) unit sold…. Y = a+bx
between costs and unit (base) is inverse / BASIC CVP ANALYSIS
negative  CONTRIBUTION MARGIN (CM)
(Sales – Variable Cost)
 BREAKEVEN POINT (BEP)
Formula: (Total sales = Total Cost)
Variable Cost Rate = change in cost / change in  MARGIN OF SAFETY
base or units (Budgeted Sales – Breakeven Sales)
Change in base of unit:  Target Profit
- DL hours, machine hours, DL costs, units  Sales Mix Analysis
of production, number of shipments, set  Degree of Operating Leverage (DOL)
up time, and other activity basis (Contribution Margin / EBIT)
Total Fixed Costs = total cost – total variable cost EBIT – Earnings before income and taxes
Estimate the costs of given level of activity SALES / UNIT
TC = TFC + UVC (Unit Variable Cost) (units) VARIABLE
The total fixed cost remains the same regardless COST
of the levels of activity FIXED COST
2. Scatter graph method
- Is regression line
- AKA visual fit analysis
- Plots the observation on a graph
- Uses the principles found in a regression PRODUCT COST
line - Direct Materials
- Straight line that depicts the relationship - Direct Labor
of 2 variables - Factory Overhead
X – independent PRIME COST
Y – dependent - Direct Materials
3. Least squares regression method - Direct Labor
Regression line: CONVERSION COST
Y = a +bx - Direct Labor
Y = dependent variable - Factory Overhead
a = constant, point of intercept Prime + Conversion + VFOH = Variable Fixed Cost
b = variable co=efficient of x/ slope VFOH – Variable Factory Overhead
x = independent variable Example Problem:
Total Cost = FC + VC EXPENSE ITEM ESTIMATED UNIT
 COST Example 1: High Low Method
2
Direct material 32 Kilos of Cost of XY x
Direct labor 10 materials operation (x)(y)
Variable FOH 15 80 800 64,000 6,400
Fixed FOH 6 60 480 28,800 3,600
Variable distribution & 3 20 320 6,400 400
admin 120 1200 144,000 14,400
Fixed Variable 4 140 1280 179,200 19,600
distribution & admin 40 480 19,200 1,600
100 1040 104,000 10,000
1. Conversion cost per unit X = 560 Y = 5,600 XY= 56,000
545,600
DL 10
Variable FOH 15
Fixed FOH 6
HIGH LOW METHOD:
Conversion 31
Cost Kilos
2. Prime Cost per unit
High 1,280 140
DM 32
Low 320 20
DL 10
Difference 960 120
Prime Cost 42
variable 960
3. Total Variable Cost per unit = =80
kilo 120
DM 32 High Low
DL 10 Total Cost 1,280 320
Variable FOH 15 Less: Variable Cost
TVC per unit 57 (140 x 8) (1,120)
4. Total cost that would incur during a (20 x 8) (160)
month with a production level of 12k units Fixed Cost 160 160
& a sales level of 8k units = must be balanced =
DM 32 Example 2: High Low Method
DL 10 Total Maintenance cost
VFOH 15 Maintenance Maintenance
FFOH 6 hours cost
Total Cost per unit 63 Jan 7,200 450,000
Production Level 12,000 Feb 6,800 422,000
Total cost in a month 756,000 *(12,000 x 63) Mar 7,000 440,000
 Apr 6,400 418,000 a = FC
The company expects to use 7,400 machine hours b = VC
in May. ∑ y=na+b Σ x
80 (5,600 = 7a + 560b) 80
* 7 (n) came from the number of observation
1. VC Rate (kg of mats)
Maintenance Maintenance * 80 came from (560 / 7)
hours cost (545, 600 = 560a + 56,000b)
High 7,200 450,000
Low 6,400 418,000 448,000 = 560a + 44800b
Difference 800 32,000 Less: 545,600 = 560a + 56000b
-97,600 = -11,200b
cost 800 -11,200 = -11,200b
= =40 pesos per machine use
hours 32000
b = 8.71 variable cost
VCR = Change in Costs / Change in activity base
5,600 = 7a + 560 (8.71)
2. Total Fixed Cost
5,600 = 7a + 4,877.6
TFC = TC - TVC
5,600 – 4,877.6 = 7a (nag transpose)
High Low
722.4 = 7a
Total Cost (maintenance) 450,000 418,000
7 7
Less: Variable Cost
A = 103.2 Fixed Cost
(7,200 x 40) (288,000)
COST VOLUME PROFIT ANALYSIS (CVP Analysis)
(6,400 x 40) (256,000)
- To know the product quality, pricing,
Total Fixed Cost 162,000 162,000
productive system
3. Budgeted maintenance cost in May
1. Sales
Variable Cost 7,400 x 40 = 296,000
- Selling price
Total Fixed Cost + 162,000
- Volume
Budgeted Cost 458,000
2. Total Fixed Cost
LEAST SQUARE METHOD
3. Variable Cost per unit
∑ y=na+b Σ x
4. Sales Mix
∑ x y=Σ x a+ b Σ x 2 Formula:
Previous Example Problem 1:
CONTRIBUTION MARGIN
y = 5,600
= Sales – Variable Cost (VC)
x = 560
BREAKEVEN POINT (BEP) IN UNITS
xy = 545,600
= Total Fixed Cost / Unit Contribution Margin
2
x = 56,000 = TFC / UCM
BREAKEVEN POINT (BEP) IN PESOS BEP Units = 3,840,000 / 96 = 40,000
= Total Fixed Cost / Unit Contribution Margin BEP Peso = TFC / UCMR
Rate BEP Peso = 3,840,000 / 40% = 9,600,000
CONTRIBUTION MARGIN RATE (CMR)
= Contribution Margin / Sale 3. Actual Sales
MARGIN OF SAFETY (MOS) Amount Unit
= actual budgeted sale (68,000 x 16,320,000 68,000
Breakeven sale 240)
=
Margin of Safety
Less: BEP (9,600,000) (40,000)
BEP – no profit or loss; cost and sale are the same
MOS 6,720,000 28,000
MARGIN OF SAFETY RATIO
= Margin of Safety / Actual sales or budgeted
4. MOS Ratio
Sales
= Margin of Safety / Actual sales or budgeted
BEP
Sales
= Fixed Cost / Contribution Margin
= 6,720,000 / 16,320,000
BEP Sales
= 41.18%
= Fixed Cost / CMP
Notes:
= Fixed Cost x Sales / Sales – Variable Cost
Profit increases when sales increases and
VCR
expenses decrease
= Variable Cost / Selling Price
Sales
Example 1:
(Expense)
Given:
Profit (loss)
Selling Price = 240/units
To manage cost – to control, reduce it, to justify
Variable Cost = 144/unit
its priority of occurrence
Fixed Cost = 3,840,000/year
Units Sold = 68,000
1. Contribution Margin
CM = Sales – Variable Cost (VC)
CM = 240 – 144 = 96
CMR = Contribution Margin / Sale
CMR = 96 / 240 = 0.4 or 40%
VCR = Variable Cost / Selling Price
VCR = 144 / 240 = 0.6 or 60%
2. BEP (units)
BEP Units = TFC / UCM