Chapter 1: Objectives, Role and Scope of Management

Accounting
Frequency of Prepared Prepared as
Basic Management Functions and Concepts Reporting periodically needed
1. Planning (monthly,
2. Directing and Motivating quarterly,
3. Controlling annually)
Level of Detail Focus mainly Extensive and
1. Planning (SCI) on business as detailed
a whole
a. Establishing a basic strategy
Necessity Mandatory Discretionary or
b. Selecting a course of action
(especially for optional
c. Specifying how action will be implemented
public entities)
Source of Data Company’s From internal
- setting immediate and long-term objectives Internal and external
- resources and tactics needed to achieve information sources
- which alternative to attain the set objectives system

2. Directing and Motivating Cost Accounting

- mobilizing people to carry out plans and run routine - subset of both management and financial accounting
operations - utilized for internal reporting for use in management
- take action to implement the plan planning and control
- motivate others - external reporting to the extent its product-costing satisfies
external reporting requirements
3. Controlling
- plan is actually carried out and is appropriately modified Role and Activities of Controller and Treasurer
The Controller: Chief Management Accounting
- comparing actual performance with set plans or standards
- monitoring results 1. Controllership
- deciding corrective actions to take should any deviation – company resources are obtained and utilized according to
(variance) plans that are in line with company’s SET OBJECTIVES
- adjusting future plans - practice of the established science of control

Distinction Among Management Accounting, Cost 2. Controller

Accounting, and Financial Accounting - responsibility for the accounting aspect of management
Financial Managerial control
Accounting Accounting - chief management accounting executive
User Perspective External users Internal users - chief accountant
Types of - FS - monetary and
Reports/Information - primarily non-monetary a. Financial Accounting
monetary b. Accounting Systems and Procedures
Guiding Principles GAAP What the
c. Government and Tax Reporting
management
d. Cost and Management Accounting
wants and needs
e. Financial Analysis and Special Studies
Purpose or End Financial Decision-making,
Result Reporting and planning and
Compliance control Controller vs Treasurer
Nature of Objective, Subjective, 1. Controller
Information or reliable and relevant and a. supervising the personnel in the accounting dept
Emphasis historical future-oriented b. preparing the info and reports used in both managerial and
Time Orientation Mainly Future-oriented financial accounting
historical using current - accounting
(past) data and past data
Unifying Model Assets = No unifying 2. Treasurer
Liabilities + model or - custody of funds
Equity equation a. raising capital
b. safeguarding assets a. Keep info confidential except when disclosure is
c. management of investments authorized or legally required
d. credit policy b. Inform all relevant parties regarding appropriate use of
e. insurance coverage confidential information
c. Refrain from using confidential information for unethical or
Controller Treasurer illegal advantage
Planning and Control Provision of Capital
Reporting and Interpreting Investor Relations 3. Integrity
Evaluating and Consulting Short-term financing a. Mitigate actual conflicts of interest
Tax Administration Banking and custody b, Refrain from engaging in any conduct that would prejudice
Government Reporting Credit and collections carrying out duties ethically
Economic Appraisal Investments c. Abstain from engaging in or supporting any activity that
Insurance might discredit the profession

Internal Auditor 4. Credibility/Objectivity

a. Reviewing the accounting procedures, records, and reports a. Communicate information fairly and objectively
in both the controller’s and the treasurer’s areas of b. Disclose all relevant information that could reasonably be
responsibility expected to influence an intended user’s understanding of
b. Expresses an opinion to top management regarding the the reports, analyses, or recommendations
effectiveness of the accounting system c. Disclose delays or deficiencies in information, timeliness,
c. Make broad performance evaluations of middle and lower processing, or internal controls in conformance with
management organization’s policy and/or applicable law

Internal Certification in Management Accounting Other Factors

Management by Objectives vs Management by Exception
Managerial Accounting as a Career
- interact frequently with sales personnel, finance specialists, Management by Objectives
production people and managers at all levels - subordinate and supervisor agree on
- knowledgeable in the other major business disciplines 1. goals
- strong oral and written communication skills 2. methods of achieving them
3. develop plan in accordance with that agreement
Professional Ethics 4. subordinate is evaluated with reference to the agreed plan
- standards of conduct for judging right from wrong, honest at the end of the period
from dishonest, and fair from unfair
Management by Exception
1. Competence - technique of highlighting those which vary significantly from
2. Confidentiality plans and standards
3. Integrity - executive time should be spent on items that are non-
4. Credibility/Objectivity routine and identified as top priority

1. Competence Line Function vs Staff Function

a. Maintain an appropriate level of professional expertise by
continually developing knowledge and skills Line Function
b. Perform professional duties in accordance with relevant - authority to command or give orders to subordinates
laws, regulations, and technical standards - exercise downward authority over line departments
c. Provide decision support information and - managers are directly involved in the provision of goods and
recommendations that are accurate, clear, concise, and services
timely
d. Recognize and communicate professional limitations or Staff Function
other constraints that would preclude responsible judgement - authority to advise but not to command others
or successful performance of an activity - the function of providing line and staff management with
specialized service and technical advice for support
2. Confidentiality - exercise laterally or upward
- managers supervise activities that supports the
organization’s overall mission
- only indirectly involved in operational activities
- include the general counsel, executive VP for government
relations, and CFO

Controller – primarily exercises a staff function since it gives

advice and service to other departments and to the entire
organization as a whole
 Chapter 2: Cost Terms, Concepts and Behavior i. Direct Materials – major materials inputs that can
be physically and conveniently traced directly to the
Nature and Classification of Costs final product

Cost ii. Direct Labor – cost of labor that can be physically

- monetary amount of the resources given up to attain some and conveniently traced to the final product
objective
iii. Manufacturing Overhead – all costs other than
Cost Terms DM and DL that must be incurred to manufacture a
1. Out-of-pockets costs – actual outlay of cash product

2. Marginal costs – sum of costs necessary to effect a one- b. Nonmanufacturing costs – all other costs incurred not
unit increase in the activity level related to the production of the physical product

3. Opportunity cost – the foregone benefit or lost i. Marketing or selling costs – costs necessary to get
opportunity of the path not taken the order and deliver the product

4. Cost Drivers – a measure of activity that is a causal factor ii. General and administration costs – all executive,
in the occurrence of costs to an entity organizational, and clerical costs
- basis to assign costs to cost objects
10. Relevant vs. Irrelevant Costs
5. Direct vs Indirect Costs a. Relevant Cost
a. Direct Costs – can be easily and conveniently traced to a - has the potential to influence a decision
unit of product or other cost object i. Differential Cost – costs that differ between
- can be specifically associate with a single cost object in an alternatives
economically feasible way ii. Sunk Cost – incurred in the past

b. Indirect Costs – cannot can be easily and conveniently b. Irrelevant Cost – cost that will not influence a decision
traced to a unit of product or other cost object
Analysis of Cost Behavior
6. Common Cost – a cost incurred for the benefit more than
one cost object Variable vs Fixed Costs
- synonymous to joint cost
- incurred in the production of two or more inseparable a. Variable Costs – costs that change, in total, in direct
products up to the point at which the products become proportion to changes in activity level
separable at split-off point
i. Total Variable Costs (TVC) – increases as
7. Controllable Cost – likely to respond to the amount of production increases
attention devoted to them be a specified manager ii. Unit Variable Cost – constant regardless of
production
8. Committed vs Discretionary Costs
a. Committed Costs – governed mainly by past decisions that b. Fixed Costs – costs that do not change, in total, regardless
established the present levels of operating and organizational of the activity level within reasonable range of activity
capacity
- only change in response to small changes in capacity i. Total Fixed Costs (TFC) – remains constant as
production increases
b. Discretionary Costs – management decides to incur in ii. Unit Fixed Cost (UFC) – decreases as production
current period to achieve objectives increases
- not required to fill orders by customers
c. Mixed Costs – contains a fixed portion that is incurred even
9. Manufacturing vs Nonmanufacturing Costs when the facility is unused, and a variable option that
a. Manufacturing Costs – all costs incurred to produce a increase with usage
physical product
 i. Total Mixed Costs (TMC) – increases less - determines the line of best fit for a set of observations by
proportionately, as opposed to total variable costs, minimizing the sum of the squares of the vertical deviations
as production increases between the actual points and the regression line
ii. Unit Mixed Cost (UMC) – decreases less
proportionately, as opposed to unit fixed cost, as n ( Σ xy )−( Σ x )( Σ y )
production increases b=
n ( Σ x ) −( Σ x )
2 2

Cost Behavior
- classified according to their reaction to changes in activity (Σ y ) (n Σ x )
a=
n
Cost Behavior Assumptions
1. Relevant Range Assumption ∑y = sum of total costs of all data pairs
- range of activity which the cost behavior patterns are valid ∑x = sum of the activities of all data pairs
∑xy = the sum of the products and activities of all data pairs
2. Time Assumption ∑x2 = sum of the squares of activities of all data pairs
- cost behavior patterns identified are true only over a
specified period of time Correlation Analysis

3. Linearity Assumption 1. Correlation Analysis – used to measure the strength of

- cost is assumed to manifest a linear relationship over a linear relationship between two or more variables
relevant range a. If the points seem to form a straight-line - high
- despite its tendency to show otherwise over the long run correlation
b. If the points form a random pattern – low or no
Splitting Mixed Costs correction

Cost Estimation (Segregation of Mixed Costs into Fixed and 2. Coefficient of Correlation (r) - measures the relative
Variable Costs) strength of linear relationship between 2 variables
a. r=-1, perfect inverse relationship
y=a+bx b. r= 0, no linear relationship
c. r=1, perfect direct relationship
y = total cost
a = total fixed cost 3. Coefficient of Determination (r 2) – proportion of the total
b= variable cost per unit variation in y that is explained or accounted for by the
x = no. of activity/units regression equation
- measure of ‘goodness of fit’ in the regression
1. High-Low Method - the higher r2 , the more confidence in the estimated cost
- simple approach that uses thee two most extreme data formula
points to determine the slope of the line (b) and the intercept
(a)
Difference∈Cost
b=
Difference∈ Activity

2. Scatter Graph (Scatter Diagram) Method

- all observed costs are plotted on a graph
- based on sound judgment, a regression line is then fitted to
the plotted points to represent the line function
- provides a visual representation of the relationship between
y and x
- helps determine the nature of the relationship and whether
the linearity assumption is valid

3. Least-Squares Regression Method