1. Managerial accounting provides information to managers inside a company to help with planning, controlling, and decision making, while financial accounting provides information to external parties like creditors and regulators. 2. There are two main formats for the income statement - the traditional format which classifies all costs as expenses, and the contribution format which separates costs into fixed and variable categories to help managers. 3. The contribution format shows contribution margin and is more useful for management decision making as it highlights the impact of changes in sales volume on operating income.

1. 1
CB2101
Managerial Accounting:
An Overview

2. 2
Types of Accounting Information
• Financial Accounting
• Provides information primarily to people outside the
company (e.g., stockholders, creditors, regulators),
through general-purpose financial statements.
• Management Accounting
• Provide information to people inside the company
(e.g., managers)
• Tax Accounting
• Provides information to the tax authorities

3. 3
Financial and Managerial Accounting: Seven
Key Differences
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on
versus relevance objectivity and verifiability relevance
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focus on
companywide reports segment reports
6. Rules Must follow GAAP / IFRS Not bound by GAAP / IFRS
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory

4. 4
Work of Management
Planning
Controlling
Decision
Making

5. 5
Planning
Establish Goals
Specify How Goals
Will Be Achieved
Develop Budgets

6. 6
Controlling
The control function gathers feedback to
ensure that plans are being followed.
Feedback in the form of performance reports
that compare actual results with the budget
are an essential part of the control function.

7. 7
Decision Making
Decision making involves
making a selection among
competing alternatives.
What should
we be selling?
Who should
we be serving?
How should
we execute?

8. 8
Managerial Accounting: Planning, Controlling,
and Decision Making
Controlling
Planning
Decision
Making
The primary purpose of
this course is to teach
measurement skills that
managers use to support
planning, controlling, and
decision making activities.

9. 9
Managerial Accounting: Measurement Skills
How should I create a financial plan
for next year?
How well am I performing relative to
my plan?
Measurement skills help
managers answer important
questions.

10. 10
Managerial Accounting: Business
Management Perspectives
Six Business Management Perspectives that
go beyond the numbers to enable intelligent
planning, control, and decision making:
• An Ethics Perspective
• A Strategic Management Perspective
• An Enterprise Risk Management Perspective
• A Corporate Social Responsibility Respective
• A Process Management Prospective
• A Leadership Perspective

11. 11
Abandoning ethical standards in business would
lead to a lower quality of life with less
desirable goods and services at higher prices.
An Ethics Perspective
Without ethical standards in business, the
economy, and all of us who depend on it for
jobs, goods, and services, would suffer.
Ethical standards in business are essential for a
smooth functioning economy.

12. 12
A Corporate Social Responsibility Perspective
CSR extends beyond legal compliance
to include voluntary actions that satisfy
stakeholder expectations.
Corporate social responsibility (CSR) is a concept
whereby organizations consider the needs
of all stakeholders when making decisions.
Customers Employees Communities
Suppliers Stockholders
Environmental
& Human Rights
Advocates

13. 13
Chapter 1
Managerial Accounting and
Cost Concepts

14. 14
What Does Cost Mean?
• Accountants define cost as a resource sacrificed or
forgone to achieve a specific objective.
• The term “cost” is a relative term, dependent both
on:
the “cost object” chosen
the purpose for which cost is being calculated and
reported.

15. 15
15
Cost Object --
Specific Product Dell XPS 600
Project Promotional campaign
Product
Category
Laptop vs. Desktop
Activity Setting up a new assembly line
Department Customer service department
Region U.S., Asia, Europe

16. 16
Different Costs for Different Purposes
•The way the cost is to be used will define the
way it should be computed.
Suppose you are asked to compute the cost of flying
one person from Shanghai to Hong Kong. How do you
get a cost per person?
Now suppose that you are told that the flight is going
anyway and you must compute the cost of adding one
more person on board. Would you use the same cost to
make the decision?

17. 17
Different Costs for Different Purposes
•External Uses
For financial reporting purposes, product cost is
determined in a standard way.
•Internal Uses
Inside the organization costs serve many different
purposes, e.g., pricing, product mixing, etc. The way
the cost is to be used will define the way it should
be computed.

18. 18
1.Assigning costs to cost objects
2.Accounting for costs in manufacturing companies
3.Preparing financial statements
4.Predicting cost behavior in response to changes in activity
5.Making decisions
Purposes of Cost Classification

19. 19
Learning Objective 1
Understand cost classifications
used for assigning costs to cost
objects: direct costs and indirect
costs.

20. 20
Assigning Costs to Cost Objects
Direct costs
• Costs that can be
easily and conveniently
traced to a unit of product
or other cost object.
• Examples: direct
material and direct labor
Indirect costs
• Costs that cannot be
easily and conveniently
traced to a unit of product
or other cost object.
• Example: manufacturing
overhead
Common costs
Indirect costs incurred to support a number of
cost objects. These costs cannot be traced to
any individual cost object.

21. 21
Learning Objective 2
Identify and give examples of
each of the three basic
manufacturing cost
categories.

22. 22
Direct
Materials
Direct
Labor
Manufacturing
Overhead
Classifications of Manufacturing Costs
The Product

23. 23
Direct Materials
Raw materials that become an integral part of the product
and that can be conveniently traced directly to it.
Example: A radio installed in an automobile

24. 24
Direct Labor
Those labor costs that can be easily traced to individual
units of product.
Example: Wages paid to automobile assembly workers

25. 25
Manufacturing Overhead
All manufacturing costs except direct material and direct labor. These costs
cannot be readily traced to finished products.
Includes indirect labor that
cannot be easily or
conveniently traced to
specific units of product
Includes indirect materials
that cannot be easily or
conveniently traced to
specific units of product.

26. 26
Manufacturing Overhead – Examples
 Examples of manufacturing overhead:
◦ Depreciation of manufacturing equipment
◦ Utility costs
◦ Property taxes
◦ Insurance premiums incurred to operate a
manufacturing facility
 Only those indirect costs associated with
operating the factory are included in
manufacturing overhead.

27. 27
Prime Costs and Conversion Costs
Manufacturing costs are often
classified as follows:
Direct
Material
Direct
Labor
Manufacturing
Overhead
Prime
Cost
Conversion
Cost

28. 28
Nonmanufacturing Costs
Selling
Costs
The costs incurred to secure
customer orders and get the
finished product to the
customer. Selling costs can
either be direct or indirect
costs.
Administrative
Costs
The costs associated with the
general management of an
organization rather than with
the manufacturing or selling.
Administrative costs can be
either direct or indirect costs.

29. 29
Learning Objective 3
Understand cost
classifications used to prepare
financial statements: product
costs and period costs.

30. 30
Product Costs
 Product costs include all the costs involved
in acquiring or making a product.
 Product costs “attach” to a unit of product as it
is purchased or manufactured and they stay
attached to each unit of product as long as it
remains in inventory awaiting sale.

31. 31
Manufacturing Product Costs
For manufacturing companies, product costs
include:
 Raw materials include any materials that go
into the final product.
 Work in process consists of units of product
that are only partially complete and will
require further work before they are ready for
sale to the customer.
 Finished goods consist of completed units of
product that have not yet been sold to
customers.

32. 32
Transfer of Product Costs
 When direct materials are used in production, their
costs are transferred from Raw Materials to Work
in Process.
 Direct labor and manufacturing overhead costs
are added to Work in Process to convert direct
materials into finished goods.
 Once units of product are completed, their costs
are transferred from Work in Process to Finished
Goods.
 When a manufacturer sells its finished goods to
customers, the costs are transferred from Finished
Goods to Cost of Goods Sold.

33. 33
Cost Classifications for Preparing
Financial Statements
Product costs include direct
materials, direct labor, and
manufacturing overhead.
Period costs include all
selling costs and
administrative costs.
Inventory Cost of Good Sold
Balance
Sheet
Income
Statement
Sale
Expense
Income
Statement

34. 34
Concept Check 1
Which of the following costs would be considered a period
rather than a product cost in a manufacturing company?
(There may be more than one correct answer.)
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
E. Sales commissions.

35. 35
Learning Objective 4
Understand cost
classifications used to predict
cost behavior: variable costs,
fixed costs, and mixed costs.

36. 36
Cost Classifications for Predicting Cost
Behavior
Cost behavior refers to how a cost will react to changes in the level of
activity.
The most common classifications are:
▫ Variable costs.
▫ Fixed costs.
▫ Mixed costs.

37. 37
Variable Cost
• A variable cost varies, in total, in direct proportion to
changes in the level of activity.
• Your total data bill is based on how much data you use.
Data Usage
Total
Data
Bill

38. 38
Variable Cost
• A variable cost per unit is constant.
• The cost of data is constant at 5 cents per mb.
Data Usage
Data
Bill
per
MB

39. 39
The Activity Base (Cost Driver)
A measure of what
causes the
incurrence of a
variable cost
Labor
hours
Miles
driven
Units
produced
Machine
hours

40. 40
• A fixed cost is a cost that remains constant, in total,
regardless of changes in the level of the activity.
• If your plan include unlimited call, your monthly fee for
the phone call is fixed. The monthly fee does not
change based on the number minutes.
Fixed Cost
Number of Minutes Used
Monthly
Fee

41. 41
• If expressed on a per unit basis, the average fixed
cost per unit varies inversely with changes in activity.
• Within the monthly contract allotment, the average
fixed cost per cell phone call made decreases as
more calls are made
Fixed Cost
Number of Minutes Used
Monthly
Fee
per
Minutes

42. 42
Types of Fixed Costs
Examples
Advertising and
Research and
Development
Examples
Depreciation on Buildings
and Equipment and Real
Estate Taxes
Discretionary
May be altered in the
short term by current
managerial decisions
Committed
Long term, cannot be
significantly reduced in the
short term.

43. 43
The Linearity Assumption and the Relevant
Range
Fixed costs would increase in a step
fashion at a rate of $30,000 for each
additional 1,000 square feet.
The relevant range of activity pertains to fixed cost as
well as variable costs. For example, assume office space
is available at a rental rate of $30,000 per year in
increments of 1,000 square feet.

44. 44
Rent
Cost
in
Thousands
of
Dollars
0 1,000 2,000 3,000
Rented Area (Square Feet)
0
30
60
Relevant Range: Graphic
90
Relevant
Range
The relevant range
of activity for a fixed
cost is the range of
activity over which
the graph of the
cost is flat.

45. 45
Cost Classifications for Predicting Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost Increase Variable cost per unit
and decrease in proportion remains constant.
to changes in the activity level.
Fixed Total fixed cost is not affected Fixed cost per unit decreases
by changes in the activity as the activity level rises and
level within the relevant range. increases as the activity level falls.

46. 46
Concept Check 2
Which of the following costs would be variable with respect
to the number of ice cream cones sold at a Baskin &
Robbins? (There may be more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.

47. 47
Fixed Monthly
Utility Charge
Variable
Cost per KW
Activity (Kilowatt Hours)
Total
Utility
Cost
X
Y
A mixed cost contains both variable and fixed elements.
Consider the example of utility cost.
Mixed Costs (1 of 2)

48. 48
Mixed Costs (2 of 2)
The total mixed cost line can be expressed
as an equation: Y = a + bX
Where: Y = The total mixed cost.
a = The total fixed cost (the
vertical intercept of the line).
b = The variable cost per unit of
activity (the slope of the line).
X = The level of activity.

49. 49
Mixed Costs – An Example
If your fixed monthly utility charge is $40, your
variable cost is $0.03 per kilowatt hour, and your
monthly activity level is 2,000 kilowatt hours, what is
the amount of your utility bill?
Y = a + bX
Y = $40 + ($0.03 × 2,000)
Y = $100

50. 50
Learning Objective 5
Understand cost
classifications used in making
decisions: differential costs,
sunk costs, and opportunity
costs.

51. 51
Cost Classifications for Decision Making
•Decisions involve choosing between alternatives.
The goal of making decisions is to identify those
costs that are either relevant or irrelevant to the
decision.
•It is important to understand the terms
differential cost and revenue, sunk cost, and
opportunity cost.

52. 52
Differential Costs
• Differential cost (or incremental cost) is the difference
in cost between any two alternatives.
• A difference in revenue between two alternatives is
called differential revenue.
• Both are always relevant to decisions.
• Differential costs can be either fixed or variable.
Example: You have a job paying $1,500 per month in your hometown.
You have a job offer in a neighboring city that pays $2,000 per month.
The commuting cost to the city is $300 per month.
Differential revenue:
$2,000 – $1,500 = $500
Differential cost :
$300

53. 53
Sunk Costs
•Sunk costs have already been incurred and
cannot be changed by any decision now or in the
future.
•These costs should be ignored when making
decisions.
Example: Suppose you had purchased gold for $400 an
ounce, but now it is selling for $250 an ounce. Should you
wait for the gold to reach $400 an ounce before selling it?
You may say, “Yes” even though the $400 purchase is a
sunk cost.

54. 54
Opportunity Cost
The potential benefit that is given up when
one alternative is selected over another.
These costs are not usually found in accounting
but must be explicitly considered in every
decision.
For students: What are the opportunity costs you incur
to attend this class?

55. 55
Concept Check 3
Suppose you are trying to decide whether to drive or take
the train to Portland to attend a concert. You have ample
cash to do either, but you don’t want to waste money
needlessly. Is the cost of the train ticket relevant in this
decision? In other words, should the cost of the train ticket
affect the decision of whether you drive or take the train
to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.

56. 56
Concept Check 4
Suppose you are trying to decide whether to drive or take
the train to Portland to attend a concert. You have ample
cash to do either, but you don’t want to waste money
needlessly. Is the annual cost of licensing your car relevant
in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.

57. 57
• Costs in manufacturing firms
Manufacturing cost (product cost)
Nonmanufacturing cost (period cost)
• Cost behavior
Variable cost
Fixed cost
• Cost assignment method
Direct cost
Indirect cost
• Decision relevance
Relevant cost
Irrelevant cost
Cost Classifications
 Direct materials (DM)
 Direct labor (DL)
 Manufacturing overhead (MOH)
 Selling costs
 Administrative costs
 Direct materials (DM) / Direct labor (DL)
 Direct selling/admin cost
 Manufacturing overhead (MOH)
 Differential cost
 Opportunity cost
 Sunk cost
 Financial Reporting
 Product cost
 Period cost

58. 58
Learning Objective 6
Prepare income statements
for a merchandising company
using the traditional and
contribution formats.

59. 59
The Traditional and Contribution Formats
Used primarily for
external reporting.
Used primarily by
management.

60. 60
Uses of the Contribution Format
The contribution format income statement is used as an
internal planning and decision-making tool. We will use this
approach for:
1.Cost-volume-profit analysis (Chapter 6).
2.Segmented reporting of profit data (Chapter 7).
3.Budgeting (Chapter 8).
4.Special decisions such as pricing and make-or-buy
analysis (Chapter 11).

61. 61
End of Chapter 1