MANAGERIAL ACCOUNTING

by
Assoc. Prof. Dr. Nguyen Thi Phuong Hoa
CONTENTS
 Chapter 1: Introduction to management accounting, cost
classification and estimation
 Chapter 2: Product costing systems

 Chapter 3: Overhead costing

 Chapter 4: Decision-making using relevant information

 Chapter 5: Standard costs and Differential Analysis

 Chapter 6: Budgeting

 Chapter 7: Performance Measurement

 Chapter 8: Environmental and social management

accounting
CHAPTER 1: INTRODUCTION TO MANAGERIAL
ACCOUNTING, COST CLASSIFICATION + ESTIMATION

 I. Features of Managerial Accounting

 II. Cost classification
 III. Cost estimation
I. FEATURES OF MANAGERIAL ACCOUNTING
 Accounting is the process of 3 basic activities:
identifying, recording and reporting/communicating
economic events/transactions of an organisation to
interested users
 To identify economic events/transactions, a company
selects economic events relevant to its business,
then
 Records those events/transactions in order to provide
a history of its financial activities, then
 Communicates the collected information to interested
users by means of accounting reports, commonly
called financial statements (FS)
 Management accounting in concerned with providing
information for managers – that is people inside an
organisation who direct + control its operations
 MA provides the essential data with which
organisations are actually run
 Financial accounting is concerned with providing
information to shareholders, creditors, + others who are
outside an organisation
 FA provides the scorecard by which a company’ past
performance is judged
 B/c it is manager oriented, study of MA must be preceded
by some understanding of what managers do, the
information managers need + the general business
environment
 DIFFERENCES BETWEEN MA + FA
FA MA
Reports to those outside the Reports to those inside the
organisation: shareholders, creditors, organisation for: planning, directing +
tax authorities, regulators… motivating, controlling , performance
evaluation + decision making
Emphasis is on summaries of financial Emphasis is on decisions affecting the
consequences of past activities future
Objectivity + verifiability of data are Relevance + flexibility of data are
emphasized emphasized
Precision of information is required Timeliness of info is required
Only summarized data for the entire Detailed segment reports, about dept,
organisation are prepared products, customers are prepared
Must follow IFRS Need not follow IFRS
Mandatory for external report Not mandatory
 Managers of any organisation carry out 4 major
activities:
 (i) planning: identifying alternatives + selecting the one that
does the best job of furthering the organisation’s objectives
 (ii) directing + motivating: mobilizing people to carry out plans
and budgets + run routine operations
 (iii) controlling: ensuring that the plan is actually carried out +
appropriately modified as situations change. Feedback is the
key to effective control
 (iv) decision making: selecting a course of action from
competing alternatives
 The role of MA: MA assist managers in carrying out their
responsibilities, which include planning, directing and
motivating, controlling, and decision making
 Useful MA information should be:
 Relevant: information must have an overall effect on the
decision  suitable and timely
 Reliable: information must be correct and be able to be
checked
 Comparable: information must be able to be compared
 Understandable: management may comprehend MA
information
 Material: the information provided must be important in terms
of the overall decision
 II. COST CLASSIFICATION
 Cost: a resource sacrified/forgone to achieve a specific
objective.
 E.g. to achieve 50 kilos of cement as raw material we have to pay
USD5, so USD5 is the cost of 50 kilos of cement
 Cost object: anything for which a separate measure of cost
is needed.
 E.g. a product, service, a project, a customer, a brand category, an
activity, a department
 Actual cost: the cost incurred
 Budgeted cost: predicted/forecasted cost
 Cost accumulation: the collection of cost data in some
organized way by means of an accounting system
Cost centres
 In general, departments are termed cost centres +
the product produced is a cost unit
 When costs are incurred, they are generally
allocated to a cost centre. A cost centre acts as a
collecting place for certain costs b/f they are
analysed further
 A cost centre can be a department, machine,
project, a new product.
 A product cost: the sum of the costs assigned to a
product for a specific purpose
 Different purposes result in different measures of
product cost:
 Pricing decision: assigned costs incurred in all business
functions of the value chain to different products
 Contracting with government agencies: production costs
plus design cost and part of R&D cost
 Preparing FSs under GAAPs: only manufacturing costs
can be assigned to products (inventories) in the FS
 COST CLASSIFICATION
 Types of costs are different based on purposes of the
users of the information
 The classification of costs is relative
 Manufacturing costs and non-manufacturing costs
 Product costs + period costs
 Direct + indirect costs (classification for assigning costs to cost
objects)
 Fixed + variable costs (classification for cost behavior analysis)
 Differential costs, opportunity costs, sunk costs (classification
for decision making)
 Controllable + non-controllable costs (classification for
controlling)
 Manufacturing costs: include
 direct material costs: costs of materials that go into the final
product
 direct labour costs: costs of labour that can easily be traced
to individual units of product
 manufacturing overheads: all costs of manufacturing except
direct materials + direct labour
 Non-manufacturing costs: include
 selling (or marketing) costs: all costs necessary to secure
customer orders + get the finished product/service into the
hand of the customer
 administrative costs: all executive, organisational + clerical
costs associated with general management of an organisation
COST CLASSIFICATION FOR STOCK VALUATION
+ PROFIT MEASUREMENT
 Direct costs: costs that can be traced in full to the
product, service, or department that is being costed
Eg: direct materials costs, direct labour costs, other
direct expenses
 Indirect costs (or overheads):
costs that are related to the particular cost object but
cannot be traced directly or in full to the product,
service
Materials cost = Direct materials + Indirect materials
cost cost
+
Labour cost = Direct labour cost + Indirect labour
costs
+
expenses = Direct expenses + Indirect expenses

Total costs = Direct costs + Indirect cost

 Total direct cost is often called prime cost
 Direct material is all material becoming part of the
product. Examples:
 components parts,
 part-finished work,
 primary packing materials

 Materials used in negligible amount can be grouped

under indirect materials as part of overhead
 Direct wages: all wages paid for labour (either as
basic hours/overtime) expended on work on the
product itself
 Direct expenses: any expenses incurred on a
specific product other than direct material cost and
direct wages. Examples:
 The cost of special designs, drawings, layout
 The hire of tools/equipment for a particular job
 Maintenance costs of tools, fixtures

 Overheads: all indirect material cost, indirect wages

and indirect expenses incurred by a business
 Overheads associated with the production process:
 Indirect materials which cannot be traced in the finished
product. Eg. Consumable stores: materials used in
negligible amounts
 Indirect wages: salaries +wages of non-productive
personnel (eg supervisors, cleaners) in the production
department
 Indirect expenses: rent, rates + insurance of a factory,
depreciation, fuel, power, repairs + maintenance of
plants, machinery + factories
 Overheads associated with administration of the
business:
 Depreciation of office equipment
 Office salaries
 Rent, rates insurance, lighting, cleaning + heating of general
offices, telephone + postal charges, bank charges, legal
charges, audit fees
 Overheads incurred in selling + distribution of goods:
 Printing + stationery
 Cost of packing cases
 Salaries + commission of sales representatives + sales staff,
wages of packers, drivers, despatch clerks
 Advertising + sales promotion, market research
 Rent, rates + insurance of sales offices, bad debts + collection
charges, cash discounts allowed, after sales services
 Freight + insurance charges, depreciation of warehouses,
vehicles
INDIRECT OR DIRECT?
 A cost classification can vary as the chosen
cost object varies
 Consider a factory supervisor’s salary:
 If the cost object is a product the factory
supervisor’s salary is an indirect cost
 If the factory is the cost object, the factory
supervisor’s salary is a direct cost
 Product costs:
 costs identified with a finished product.
 costs of purchasing or manufacturing of goods.
 Are initially identified as part of the value of stock. They
become expenses (in the form of cost of goods sold)
only when the stock is sold
 Period cost: associated with time periods. They are
deducted as expenses during the current period
without being included in the value of stock held
COST CLASSIFICATION FOR DECISION MAKING
 Variable costs: vary with the level of activity. Eg. Direct
material costs, sales commission, telephone charges
 Fixed costs: costs incurred for a particular period of
time + which, within certain activity levels, is unaffected
by changes in the level of activity. Eg. Rental cost of
business premises
COST CLASSIFICATION FOR CONTROL
 Controllable costs: Cost that can be influenced by a
manager’s decisions and actions
 Uncontrollable costs: Cost that cannot be affected
by management within a given time span
 CVP ANALYSIS
 Breakeven analysis: P*Q = FC + VCU*Q
Breakeven quantity (Q) = FC/(P - VCU)
 Target profit analysis: P*Q = FC + VCU*Q + TP
 Q = (FC + TP)/(P - VCU)
 Contribution margin = P*Q – VCU*Q
 Contribution margin per unit = P – VCU
 Margin of safety = budgeted (actual) sales – breakeven sales
 Margin of safety percentage = margin of safety/budgeted (or
actual) sales
 Sales mix: the relative proportions in which a company’s
products sold
 Exercises of Hongren et al. (2015)
EXERCISE:

 Jenny runs a small business in leather shoes trading.

She rented a shop for VND20 million per month. The
selling price is VND3 million per pair of shoes. The
purchasing price is VND2 million per pair of shoes.
Required:
 (i) how many pairs of shoes should be sold each month
to get breakeven?
 (ii) how many pairs of shoes should be sold each month
for getting target profit of VND50 million per month?
 (iii) now assume that Jen recruits a saleman with
monthly salary of VND 3 mill. and 5% of revenue, how
many pairs of shoes should be sold each month to get
breakeven?
III. COST ESTIMATION
 Involves the measurement of historical costs to predict future
costs
Cost estimation methods
 Some techniques are more sophisticated than others + are
thus likely to be more reliable but the simple techniques are
more commonly found + should give estimates that are
sufficiently accurate for their purpose
Account-classification methods or engineering method
 The manager responsible for estimating costs will go through a
list of the individual expenditure items. Each item will be
classified as fixed, variable or semi-variable, + values will be
assigned to these, probably by reference to the historical cost
accounts with an adjustment for estimated cost inflation
 This technique depends on the subjective judgement of each
manager + his skill + realism in estimating costs, so only an
approximate accuracy can be expected
High/low method
 Use data of high performance and low performance to
estimate the cost function. Then the cost function is used
to estimate future costs. Drawback: only two historical
cost records from previous periods are used. Advantage:
relative simplicity.
The scatter graph
 A graph can be plotted of the historical costs from
previous periods, + from the resulting scatter diagram, a
line of best fit can be drawn by visual estimation
 The advantage of this method over the high/low method
is that a greater quantity of historical data is used in the
estimation. The disadvantage is that the cost line is
drawn by visual judgement + is a subjective
approximation
THE COST OF FACTORY POWER IS IN THE
FOLLOWING TABLE. BUDGETED PRODUCTION FOR
20X5 IS 10,200 UNITS. ESTIMATE THE COST OF
FACTORY POWER WHICH WILL BE INCURRED?

Units of output Cost of factory

produced power ($)
20X1 7,900 38,700

20X2 7,700 38,100

20X3 9,800 44,400

20X4 9,100 42,300