Chapter 1: Introduction to Managerial Accounting
-Management Accounting- -Financial Accounting-
1. Internally focused 1. Externally Focused
2. No mandatory rules 2. Must follow externally imposed
3. Financial and non-financial info; rules
Subjective information possible 3. Objective financial information
4. Emphasis on the future 4. Historical orientation
5. Internal evaluation and decisions 5. Information about the firm as
based on very detailed info a whole
6. Broad, multidisciplinary 6. More self-contained
-setting objectives and identifying methods to achieve objectives
-ex. A firm’s objective may be to increase profits by improving quality
-management must develop some specific methods that, when
implemented, will achieve the objective
-the managerial activity of monitoring a plan’s implementation and taking corrective
-usually achieved by comparing actual performance with expected performance
-management accounting plays a vital role in providing needed information
-a major role of management accounting is to supply information that facilitates decision
-decisions can be improved if information about the alternatives is gathered
1. Cost Leadership – provide the same or better value to customers at a lower cost
2. Product Differentiation – providing something to customers not provided by
-set of activities required to design, develop, produce, market, and deliver products and
services to customers
-relating management accounting to all aspects of a business
-helps get a broader vision, which allows managers to increase quality, reduce the time
required to service customers (both internal and external) and improve efficiency
-Certified Management Accountant (CMA)-
-Main purpose: to establish management accounting as a recognized, professional
-Four areas emphasized for certification:
1. Economics, finance, and management
2. Financial accounting and reporting
3. Management reporting, analysis, and behavioral issues
4. Decision analysis and information systems
Chapter 2 study guide
1. Cost object is something that you want to know cost information about. Examples are
process, activity, product, people, or departments. Accurate costs are vital for
profitability, analysis, and strategic decisions concerning product design, pricing, and
2. a. Direct costs are costs that can easily and accurately be traced to a cost object. The
relationship between direct costs and the cost object is easy to physically observe. The
more costs that can be traced yield more accuracy.
b. Indirect costs are costs that cannot be easily and accurately traced to a cost object.
c. The allocations of indirect costs to cost objects are done using a reasonable and
convenient method. They are connected by an assumed linkage. This allocation is
important to help determine value of inventory and cost of goods sold.
3. There are two types of outputs: tangible products and service products.
a. Tangible products are goods produced by consuming raw materials through the
use or labor and capital inputs (land, plant and machinery)
b. Service products are tasks or activities performed for a customer or an activity
performed by a customer using an organization’s products or facilities.
i. tangible products are tangible, services are perishable.
ii. Inventory is important for tangible products.
iii. Producers of services and buyers of services are in direct contact.
iv. Services have greater variation.
d. For a manufacturing firm, an income statement begins with sales revenue. Then
you subtract cost of goods sold to equal gross margin. After that, you subtract
selling expenses. (ex: commission, fixed selling expense, and administrative
expense). Once all expenses are subtracted from the gross margin, you have your
operating income. Operating income is the last line on the income statement.
Shown on page 41.
e. For a service organization, an income statement begins with sales. Then you
subtract cost of services sold. These are direct materials, direct labor, and
overhead (on the income statement, each of the cost of services sold receives its
own line). Once the cost of services sold is subtracted, you get the gross margin.
Then you subtract other expenses (ex: selling expense, administrative expense).
Once this is gone, you will have operating income, which is the last line of the
income statement. Shown on page 43
4. Product costs (also known as manufacturing costs) are those costs associated with the
manufacture of goods or the provision of services. They are required for external
reporting. An important part of product costs is that they can be inventoried. Product
costs can be classified as direct materials, direct labor, or overhead.
a. Other non-manufacturing costs are treated as period expenses. Period expenses
are made up of selling (marketing) costs or administrative costs. Period costs are
expensed in the period which they are incurred, not inventoried.
i. Selling costs are costs including advertising and promotion,
compensation for sales staff(salaries and commission), warehousing,
distribution or shipping, and customer service.
ii. Administrative costs are costs that include other costs necessary to keep
the company up and running, such as research and development, top
executive salaries, corporate office costs, human resources and
accounting department costs, legal fees, and data processing.
5. Product costs are inventoriable. They are initially added to an inventory account and
remain in inventory until they are sold. Because period costs are expensed in the period in
which they are incurred; they are not inventoried. None of these costs can be assigned to
products or appear as part of the reported values of inventories on the balance sheet.
6. Manufacturing overhead can be hard to measure and assign. This is because it contains a
wide variety of items. MOH is any other item that is used in, or activity that occurs in, the
production facility. This includes indirect materials and indirect labor. As mentioned
earlier, indirect costs’ relationship to the product cost cannot be physically detected.
MOH= indirect material + indirect labor + other overhead.
7. Total product costs is equal to Direct Material + Direct Labor + MOH. Once you find
total product cost, you divide that by the number of units. This gives you the unit product
cost (or the cost it took to produce each unit). This relates to cost of goods sold and costs
of goods manufactured because this unit product costs tells you the cost of each unit,
helping you determine how much each item is. Cost of goods manufacture is the total
product cost of all goods completed during a current period. Costs of goods sold is total
product cost for the units that were sold during a period.
8. Cost of goods manufactured(COGM) are total product cost of all goods completed during
a current period. You can figure this out by using the work in progress account (WIP).
WIP is BB+ DM+ DL+ MOH – COGM=ending balance. Use algebra to calculate
Cost of goods sold are total product cost of all goods sold during a period. This can be
done by using the finished goods account. The finished goods account is BB+COGM-
COGS=Ending balance. Once again, use algebra.
9. Preparing an income statement for a manufacturing firm, see what I wrote for number 3
part d. Or see page 41.
Additional Vocabulary for Ch. 2
1. Prime Cost- the sum of DM cost and DL cost.
2. Conversion Cost- the sum of DL cost and MOH cost.
3. Raw materials account- account containing the amount of raw materials a company has.
BB + Purchased - Used= ending balance.
4. Work in progress inventory- the cost of the partially completed goods that are still on the
factory floor at the end of the time period. BB+ DM + DL + MOH – COGM = ending
5. Finished Goods Inventory- account containing the goods of a company that are finished
but not yet transferred out of the factory. BB+ COGM – COGS =ending balance.
6. Gross Margin- the difference between sales revenue and the cost of goods sold.
Chapter 3 Review
-Cost Behavior- refers to how a particular cost reacts to changes in a related activity ( or output)
- Examples of activities that could be related to costs include production volume, sales
volume, number of customers, batches produced, or hours worked.
-Variable Costs- costs that vary in total in direct proportion to changes in output levels, but
remain fixed in a per unit basis. Basically, it increases in total with an increase in output and
decreases in total with a decrease in output.
- Examples: Flavor syrup (DM)- $.05/ unit, Direct Labor (usually), Overtime, Sales
-Fixed Costs- costs that remain constant, in total, regardless of changes in the level of output, but
vary on a per unit basis as the output level changes.
-Examples: Security, some electricity, executive salaries
-Mixed or semi-variables costs- costs that contain both variable and fixed elements.
-Examples: Sales representatives are often paid a salary plus a commission on sales.
Suppose that Colley Computers has 10 sales representatives, each earning a salary of
$30,000 per year, plus a commission of $25 per computer sold. The activity is selling,
and the output measure is units sold. If 50,000 computes are sold, then the total cost
associated with the sales representatives is $1,550,000—the sum of the fixed salary cost
of $30,0000 (10 x $30,000) and the variable cost of $1,250,000 ($25 x 50,000).
-The formula for a mixed cost is as follows:
Total cost = Total fixed cost + Total variable cost
-For Colley Computers, the cost of the sales representatives is represented by the
Total cost = $300,000 + ($25 x number of computers sold)
-Commited Fixed Costs- is a fixed cost that cannot be easily changed. Often, committed fixed
costs are those that involve a long-term contract (e.g., leasing of machinery or warehouse space)
or the purchase of property, plant, and equipment. For example, a construction company may
lease heavy-duty earth moving equipment for a period of 3 years. The lease cost is a committed
-Discretionary Fixed Costs- are fixed costs that can be changed relatively easily at management
discretion. For example, advertising is a discretionary fixed cost. Advertising cost depends on the
decision by the management to purchase print, radio, or video advertising. The cost of this may
depend on the size of the ad or the number of times it runs, but it does not depend on the number
of units produced or sold.
Factors that affect cost behavior:
-Relevant Range- is the range of output over which the assumed cost relationship is valid for the
normal operations of the firm. It limits the cost relationship to the range of operations that the
firm normally expects to occur.
-Time Horizon- short, long, mid-range
-Management or Governmental Policies- Limitations, regulations, etc…Basically it is
whatever management or government does to affect the level of output.
Chapter 5: Job-Order Costing
1. Wide variety of distinct products
2. Costs accumulated by job
3. Unit cost computed by dividing total job cots by units produced on that job
4. Common job-order activities: printing, construction, furniture making, medical and dental
services, automobile repair, and beautician services.
1. Homogeneous products
2. Costs accumulated by process or department
3. Unit cost computed by dividing process costs of the period by the units produced in the
4. Process activities: process manufacturers include food, cement, petroleum, and chemical
Normal costing determines the unit cost by adding actual direct material (DM), actual
direct labor (DL), and estimated overhead (Applied MOH).
To produce an accurate cost of each unit produced, companies use normal costing to
calculate costs that are not directly associated with the production of the unit. A
company can use Job-Order costing with normal costing, as well as Process Costing with
PDOR (Used in Normal Costing)
Calculated at the beginning of the year by dividing the total estimated/budgeted annual
overhead by the total estimated level of associated activity or cost driver.
(Budgeted MOH/ Budgeted activity)= PDOR
1. Plantwide overhead rate- is a single overhead rate
2. Departmental overhead rate- overhead estimated for a department. Each department has
its own PDOR.
1. Over-applied- the applied MOH is larger than the actual MOH
2. Under-applied- the applied MOH is smaller than the actual MOH
Job-Order Cost Sheet- Prepared every time a new job is started. It is the subsidiary to the work-
in-process account and is the primary document for accumulating all costs related to a particular
Materials Requisition Form- The cost of a direct materials is assigned to a job on this document.
Chapter 6: Process Costing
Textbook pg. 200
Notes pg. 25
I. Production environments where process costing is used
a. Process costing works well whenever relatively homogeneous products
pass through a series of processes and they receive similar amounts of
b. Examples include large manufacturing plants, such as chemical, food, and
II. Types of Processes
a. Sequential processing – units must pass through one process before they
can be worked on in later processes
b. Parallel processing – two or more sequential processes are required to
produce a finished good
i. Partially completed units can be worked on simultaneously in
different process and then brought together in a final process for
III. Flow of costs in a process costing system
a. Costs are accumulated by department, rather than by job and each
producing department has its own work-in-process account
b. Work in process for each department will usually include the costs
transferred in from the previous department (with the exception of the first
department in the process).
c. Normal costing is usually used to apply overhead
Dept. 1 Dept. 2 Dept. 3 Finished Goods COGS
wip wip wip
$ $$ $$$
IV. Preparing a production report using weighted average method
a. Step 1: Physical Flow Analysis
i. Trace the units of production
ii. The analysis of physical flow of units is usually accomplished by
preparing a physical flow schedule
iii. First need to find units started and completed by subtracting the
units in beginning wip from total units completed
iv. Next, units started are obtained by adding the units started and
completed to the units in ending wip
b. Step 2: Calculations of Equivalent Units
i. Add completed units plus unfinished units and multiply by percent
ii. Do this calculation for both DM and Conversion costs
c. Step 3: Computation of Unit Cost
i. Take totals cost divided by total number of equivalent units
ii. Do this calculation for both DM and Conversion costs
d. Step 4: Valuation of Inventories
i. Assign value to goods transferred out, and to ending wip
ii. Completed units = # of completed units * cost per eu DM
# of completed units * cost per eu Conv.
iii. Unfinished units = # eu for DM * cost per eu
# eu for Conv. * cost per eu
e. Step 5: Cost Reconciliation
i. Total manufacturing costs are assigned to inventories so total costs
assigned to goods transferred out and to ending wip must agree
with the total costs in beginning wip and the manufacturing costs
incurred during the current period
V. Chapter Key Terms
a. Sequential processing – units must pass through one process before they
can be worked on in later processes
b. Parallel processing – two or more sequential processes are required to
produce a finished good
c. Transferred-in costs – costs transferred from a prior process to a
d. Production report – the document that summarizes the manufacturing
activity that takes place in a process department for a given period of time
e. Equivalent units of output – complete units that could have been produced
given the total amount of manufacturing effort expended for the period
f. Weighted average costing method – combines beginning inventory costs
and work done with current-period costs and work to calculate this periods
g. FIFO costing method – separates work and costs of the equivalent units in
beginning inventory from work and costs of the equivalent units produced
during the current period
I. Limitations of Functional Based Costing (plant-wide P.D.O.R. for MOH
a) Averaging approach may produce distorted costs
1. severely over or under cost individual product costs
b) 2 factors that prevent unit based PDORs from accurately assigning costs
1. the proportion of non-unit related overhead costs to total
overhead costs is large
2. the degree of product diversity is great
II. Non-unit Related Overhead Costs
a) unit-level activities- activities that are performed each time a unit is
b) non-unit leve activities- activities that are not performed each time a unit
1. Example: setting up equipment
2. As a result, Non unit level drivers are needed to accurately assign
costs of non-unit level activities.
III. Product Diversity
a) product diversity-products consume overhead activities in systematically
1. Product size, complexity, set up time, and size of batches can all
cause products to consume overhead at different rates
2. Costs distortions due to these factors can be solved by activity
IV. Activity Based Costing (ABC)
-assign a rate for each individual overhead activity and use rate to assign costs
a) first step is to compile an activity dictionary
1. activity dictionary-lists the activities in an organization along
with some critical activity attributes
2. activity attributes-financial and nonfinancial info items that
describe individual activities
b) 2nd step is to assign costs to activities
1. determine how much it costs to perform each activity
2. requires identifying the resources consumed by each activity
a. Resources: labor, materials, energy & capital
b. resource drivers- factors that measure the
consumption of resources by activities.
c. once resource drivers are identified, the costs of the
resource can be assigned to the activity
c) Assigning Costs to Products
1. Multiply a predetermined activity rate by the usage of the
activity, as measured by the activity drivers
V. Activity Based Customer and Supplier Costing
a) ABC can also determine the costs of customers and suppliers
b) Done the same way as MOH assigned to products
c) Customer driven activities are identified, assigned costs, and applied to
1. Examples of customer activities-sales calls, shipping, order entry
2. Supplier Costing is done the exact same way
VI. Process-Value Analysis
a) focuses on cost reduction rather than cost assignment and is fundamental
to activity based management
- concerned with: 1) driver analysis 2) activity analysis 3)
b) management must understand what causes activity costs
1. activity inputs- the resources consumed by the activity
2. activity outputs- the result or product of an activity
Example: Moving materials: Inputs-forklift, fuel;
Outputs- moved materials
3. activity output measure- the number of time the activity is
c) driver analysis- the effort expended to identify those factors that are the
root causes of activity costs
d) activity analysis- the process of identifying, describing, and evaluating the
activities an organization performs
The 4 Outcomes of activity analysis:
1) what activities are performed
2) how many people perform the activities
3) the time and resources required to perform the activities
4) an assessment of the value of the activities to the organization,
including a recommendations to keep only those that add value
VII. Value Added and Non-Value added activities
-outcome 4 of activity analysis includes the classification of activities as value
added or non value added activities.
a) value-added activities-activities necessary to stay in business
1. Two Types: Mandated and discretionary
2. Mandated are required activities like reporting to the SEC & IRS
3. Discretionary are value added IF all 3 of the following are met:
A) the activity produces a change of state
B) the change of state was not achievable by
C) the activity enables other activities to be
b) value added costs- costs to perform value-added activities with efficiency
c) non value added activities- all other activities not necessary to stay in
1. Example: reworking assembly lines, scheduling, moving,
d) non value added costs- costs that are caused either by non value added
activities or the inefficient performance of value added activities
VIII. Cost Reduction
-after non-value added activities are identified, the goal is to reduce costs
a) 4 ways activity management cuts costs:
1. Activity elimination
2. Activity selection
3. Activity reduction
4. Activity sharing
b) activity elimination- rid the organization of activities that fail to add value
example-eliminate inspection of parts by buying from
higher quality suppliers
c) activity selection- choosing among different sets of activities that are caused
by competing strategies
d) activity reduction-decreases the time and resources required by an activity
e) activity sharing- increases the efficiency of necessary activities by using
economies of scale.
IX. Activity Performance Measurement
a) Asses how well an activity was performed and the results achieved.
b) Measures of activity performance center or 3 dimensions:
c) efficiency focuses on the relationship of activity inputs and outputs
d) quality is concerned with doing the activity right the first time it is
e) time is critical because longer times mean more resource consumption
1. cycle time and velocity are 2 operational measurements of time
2. cycle time-the time it takes to produce a unit of output from the
time raw materials are received until the good is delivered
3. velocity-the number of units of output that can be produced in a
given period of time. Velocity is the reciprocal of cycle time
Chapter 7 Appendix: Quality Costs
A. Quality improvement can increase profitability in two ways:
o By increasing customer demand
o Decreasing costs
B. Defining Quality:
o A quality product or service is one that meets or exceeds customer expectations.
o Customer satisfaction.
o Conformance: when a product is reliable, durable, fit for use, and performs well.
Traditional View of Conformance: when there is an acceptable range of
Robust View: When the target must be reached every time.
o Defective product: one that does not conform to specifications.
C. Control and Failure Costs:
o Control Activities: There to prevent or detect defective products
Prevention Costs: Training programs, Quality design/engineering,
Supplier certification, field testing.
Appraisal Costs: Inspecting Materials, Product/process acceptance,
Product Acceptance – sampling from batches of finished goods
to determine whether they meet quality acceptance level.
Process Acceptance – sampling goods while in process to see if
the process is in control and producing non defective goods
o Failure Activities: response to defective products.
Internal Failure costs: Scrap, Rework, Downtime, Design Changes.
External Failure Costs: Legal costs, warranty work, returns, allowances
for poor quality, hidden costs.
Observable failure costs: Available in your records. (Both product
costs and period expenses)
Hidden Failure costs: Not easily observed, must be estimated.
D. Acceptable Quality Level: the percentage of defective products that you are willing to
live with. (Where conformance and failure costs meet).
o Robust quality has a zero defects approach, they have no range of conformance
and spend zero money with 100% quality level. (Look at graphs on page 53 in
o Cycle time: Length of time required to produce one unit of product.
o Velocity: Number of units that can be produced in a given period of time.
Chapter 8: Profit Planning
Budgets give an organization several advantages:
o It forces managers to plan
o It provides information that can be used to improve decision making
o It provides a standard for performance evaluation
o It improves coordination and communication
Master Budget – comprehensive financial plan for the organization as a whole
o A master budget can be divided into two components:
Operating Budgets – describe the income generating activities of the
firm: sales, production, and finished gods inventories
Financial Budgets – detail the inflows and outflows of cash and the
overall financial position
The following are types of operating budgets:
o Sales – the projection approved by the budget committee that describes expected
sales in units and dollars
(Predicted Sales * Unit Selling Price) = Budgeted Sales
o Production – describes how many units must be produced in order to meet sales
needs and satisfy ending inventory requirements
Units to be Produced = Expected Unit Sales + Units in Ending Inventory
(DEI) – Units in Beginning Inventory (BI)
o Direct Materials – the amount and cost of raw materials to be purchased in each
Purchases = Direct Materials needed for Production + Desired Direct
Materials in Ending Inventory – Direct Materials in Beginning Inventory
o Direct Labor – shows the total direct labor hours needed and the associated cost
for the number of units in the production budget
Units Produced * DL per unit = Total Hours Needed * Average Wage
per hour = Total DL Cost
o Overhead – shows the expected cost of all production costs other than direct
materials and direct labor
Budgeted DL hours * Variable Overhead Rate = Budgeted Variable
Overhead * Budgeted Fixed Overhead = Total MOH
o Selling and Administrative Expenses – outlines the planned expenditures for
Total Variable Expenses (Planned Sales * Variable S&A per unit) +
Total Fixed Expenses (salaries, utilities, depreciation, advertising,
insurance) = Total Expenses
The expected financial position at the end of the budgeted period is shown in the
financial budget. The following are the usual financial budgets:
o The cash budget
o The budgeted financial sheet
o The budget for capital expenditures
Cash Budget – helps to document the need for cash, as well as determine the company’s
ability to pay back loans
o Beginning cash balance + cash receipts (sales) = Cash Available – Cash
Disbursements (RM, DL, MOH, S&A, Taxes, Depreciation) – Minimum Cash
Balance = Cash Surplus/Deficiency + Cash from loans – Loan repayments +
minimum cash balance = Ending Cash Balance
Goal Congruence – the alignment of managerial and organizational goals.
Dysfunctional Behavior – individual behavior that is in basic conflict with the goals of
o Budgetary Slack – a manager deliberately under/overestimates costs
o Continuous Budget – a moving 12 month budget
o Participative Budgeting – allows subordinate managers a say in how the budgets
Chapter 14: Support department cost allocation
1. Differences between Support and revenue Producing departments
Support Departments: provide essential support services for producing departments
(maintenance, grounds, personnel)
Producing: directly responsible for creating the products or services sold o customers.
2. Why would a business allocate support department costs to producing departments?
Objectives for doing so: obtain mutually agreeable price, compute product line
profitability, predict economic effects of planning and control, value inventory, motive
3. Logical allocation bases for different support departments.
A.K.A.- cost drivers: # of employees, machine hours, qty of orders
4. Describe allocation methods and analyze the benefits/ drawbacks from each method
Direct: Support costs are only assigned to producing departments by %
o Simple/easy to compute and understand
o Does not provide info about the exchange of services
Sequential: Costs are allocated in a step-down manner from support departments to
o More complex, provides limited info about the exchange of services
o Doesn’t provide complete info about operations
Reciprocal: Costs are allocated between all support departments, and then to producing
o Complete info about the exchange of services between support departments
o Complex, so hard to understand
5. Complete the allocation of support department costs using the direct method.
See lecture notes page 34 for complete example