Lecture Notes 3 – Management Advisory Services
ACC 407 – Management Accounting Refresher Course with Comprehensive Examination
I. Absorption and Variable Costing Production is Less than Sales
Absorption costing or full costing - a product costing -when production is less than sales, there is a decrease
method that includes all the manufacturing (direct in inventory. Fixed overhead expensed under absorption is
materials, direct labor, and both the variable and fixed greater than fixed overhead expensed under variable
factory overhead) in the cost of a unit product. costing. Therefore, absorption income is less than
variable costing income.
Under the absorption costing method, fixed factory
overhead is treated a product cost.
Variable costing or contribution margin reporting - a Reconciliation of absorption and variable costing income
product costing methods that includes only the variable figures
manufacturing cost (direct material, direct labor, and
Absorption costing income xx
variable overhead) in the cost of a unit product.
Add: fixed overhead in the beg. inventory xx
Under the variable costing method, fixed factory overhead
is treated as a period cost. Total xx
Product Cost Component Less: fixed overhead in the ending inventory xx
Absorption costing Variable costing Variable costing income xx
Direct materials Direct materials
+ Direct labor + Direct labor Accounting for difference in income
+ Variable FOH + Variable FOH Change in inventory (Production less sales) xx
+ Fixed FOH ------ Multiply by: Fixed FOH cost per unit xx
Product cost Product cost Difference in income xx
Difference in Net income Under Absorption and Variable
Costing
The extremes
In variable costing, manufacturing overhead is expense
during the period when the fixed overhead is incurred, 1. Supervariable costing or throughput costing - treats
while in absorption costing, it is expensed in the period direct materials as the only variable costs.
when the units to which such fixed overhead has been
related are sold. 2 Super absorption costing - treats costs from all links
in the value chain as inventoriable costs
Production Equals Sales
II. Accounting Information and Short-Term
-when production is equal to sales, there is no change
Decision Making
in inventory. Fixed overhead expensed under absorption
costing equals fixed overhead expensed under variable Decision making – function of selecting courses of action
costing. Therefore, absorption income is equals variable for the future
costing income.
Decision model – formal method used by managers for
Production is Greater than Sales making a choice. It often involves both quantitative and
qualitative analyses.
-when production is greater than sales, there is an
increase in inventory. fixed overhead expensed under Basic Steps in a Decision Model
absorption is less than fixed overhead expensed under
variable costing. Therefore, absorption income is greater A. Identify the problem.
than variable costing income. B. Obtain information and make predictions.
Master budget – encompasses the organization’s
C. Identify and evaluate the alternative courses of operating and financial plans for a certain future
action, then choose the best alternative. period of time.
D. Implement the decision.
Computational Formats
E. Evaluate the performance of the decision
implemented to provide feedback. *Budgeted Production*
Obtain Information and Make Predictions Budgeted Sales xx
1. Qualitative and quantitative information Add: Desired ending finished goods inventory xx
2. Relevant information
Total xx
Relevant costs and revenues – expected future costs and
revenues that differ among alternative courses of action Less: Expected beg. finished goods inventory xx
Relevant Costs Budgeted production
xx
Differential cost – costs present in one alternative
but are absent in whole or in part in another
alternative *Budgeted Materials purchase*
Avoidable costs – costs that can be eliminated
Opportunity costs – contribution to income that is Total materials to be used xx
foregone when one action is taken over (Budgeted production x quantity of
materials required per unit of product)
Irrelevant Costs
Add: Desired ending materials inventory xx
Sunk costs (past cost)
Future costs Total xx
Pricing Decisions Less: Expected beg. materials inventory xx
Factors that Influence Product Pricing Budgeted materials purchase xx
a. Internal factors – relevant costs in value chain
b. External factors – competition, legal requirements,
*Budgeted Merchandise purchase*
demand supply, customer’s perception, price
elasticity of demand Budgeted Sales xx
Pricing Method Add: Desired ending merchandise inventory xx
a. Cost -based pricing - price will recover all costs in Total xx
the value chain and provide a desired return
b. Market-based pricing - prices are based on the Less: Expected beg. merchandise inventory
product’s perceived value and competitor’s actions xx
c. Competition-based pricing – based on Budgeted merchandise purchases xx
competitor’s price
d. New product pricing – price skimming/penetration
pricing.
*Cash Budget*
III. Operating and Financial Budgeting Cash balance, beginning xx
Budget – a realistic plan, expressed in quantitative Add: Receipts xx
terms for a certain future period of time.
Total cash available for current financing xx
Budget committee – composed of key management
persons who are responsible for overall policy matters Less: Disbursements xx
relating to budget program and for coordinating the Excess (Deficiency) of cash available over
preparation of the budget itself. disbursement xx
Financing xx d. Analysis of variation in gross profit and net
income
Cash balance, ending xx
e. Cash flow analysis
TYPES OF BUDGETS
Horizontal Analysis – involves comparison of figures
1. Master budget shown in the financial statements of two or more
2. Continuous (rolling) budget – budget that is consecutive periods.
revised on a regular basis
Formula:
3. Fixed budget – budget based on only one level
of activity Percentage change = Most Recent value – Based Period value
4. Flexible budget – series of budget prepare for Based Period Value
many levels of activity
5. Incremental budgeting – budgeting process Vertical Analysis – process of comparing figures in
wherein the current period’s budget is simply the financial statements of a single period.
adjusted to allow for changes planned to the
coming period Ratio Analysis – ratios are calculated from the
6. Zero based budgeting – a budget is prepared financial statements to provide users of such
every period from a base of zero. statements with relevant information about the firm’s
7. Life cycle budget – a product’s revenues and liquidity, use of leverage, asset management, cost
expenses are estimated over its entire life control, profitability, growth and evaluation.
cycle.
8. Activity based budgeting – applies the ABC a. Liquidity ratios – provide information about
principles and procedures of budgeting. the firm’s ability to pay its current obligations
9. Kaizen budgeting – assumes the continuous and continue operation.
improvements of product and processes; the b. Leverage ratios – measure the company’s use
effect of improvement and the costs of their of debt to finance assets and operations
implementation are estimated. c. Asset management ratios – measure how the
10. Governmental budget – a budget that is not firm uses its asset to generate revenue and
only a financial plan and basis for
income.
performance evaluation but also an expression
d. Cost management ratios – measure how will a
of public policy and a form of control having
the force of law firm controls its costs.
e. Profitability ratios – measure earnings in
Budget Manual - describe how budget is to be prepared. relation to some bases such as assets, sales or
1. Budget planning calendar -schedule of activities capital.
for the development and adoption of budget. f. Growth ratios – measure the changes in
2. Distribution instructions economic status of the firm over a period of
time.
Budget Report – shows a comparison of the actual and
g. Valuation ratios – measure of shareholder
budget performance
value as reflected in the price of the firm’s
IV. Analysis and Interpretation of Financial stock.
Statements
Cash flows Analysis – a detailed study of the net
Financial Statement Analysis – involves careful selection change in cash as a result of operating, investing and
of data from financial statements in order to assess and financing activities during the period.
evaluate the firm’s past performance, its present condition
and future business potentials. Statement of cash flows – the basic financial
statement prepared and used in analyzing cash flows.
Techniques Used in Financial Statement Analysis
It reports the cash receipts, cash payments and net
a. Horizontal Analysis (Trend Ratios and changes in cash resulting from operating, investing
Percentage) and financing activities of the firm during the period.
b. Vertical Analysis (Common-sized statements)
c. Ratio Analysis Classification of Cash Flows
1. Operating Activities – cash effects of
transactions that create revenues and
expenses. Operating activities generally relate
to changes in current assets and current
liabilities.
2. Investing activities – generally relate to
changes in non-current assets References:
3. Financing activities – relate to changes in
long-term liabilities and stock holders’ equity
accounts.
NAME OF COMPANY
Statement of Cash Flows
Period Covered
Cash flows from operating activities
List of individual items xx
Net cash provided (used) by xx
operating activities
Cash flows from investing activities
List of individual items xx
Net cash provided (used) by xx
investing activities
Cash flows from financing activities
List of individual items xx
Net cash provided (used) by xx
financing activities
Net Increase (Decrease) in cash xx
Cash balance, beg. xx
Cash balance, end of period xx
Significant of Non-cash Activities
- These are not reported in the body of the
statement of cash flows. These are reported
as a separate schedule at the bottom of the
statement of cash flows or in a separate note
or supplementary schedule to the financial
statements.
Rodelio S. Roque, B. C. (2011). Reviewer in Management Advisory Services. Manila: GIC Enterprises and Co. Inc.
