Module 1 Managerial Accounting Concepts and Cost Segregation

NORTHEASTERN COLLEGE
Villasis, Santiago City
COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION
MANAGERIAL ACCOUNTING
Managerial accounting – is concerned with providing information to managers, i.e., those who are
inside an organization and who are charged with directing and controlling its operations.
Financial accounting – is concerned with providing information to shareholders, creditors, and others
who are outside an organization.
Strategic planning – is the implementation of an organization’s objectives.

Phase 1: Product Strategy – deciding on the products to produce or the services to render.
Phase 2: Marketing Strategy
Functions of management
1. Planning
2. Organizing and directing
3. Controlling
4. Decision making
Organizational structure
Decentralization – means the delegation of decision making authority throughout an organization by

allowing managers at various operating levels to make key decisions relaing to their area of
responsibility.
Line and staff relationships

1. Line position – is one that relates directly to the carrying out of the basic objectives of an
organization.
2. Staff position – is one that relates only indirectly to the carrying out basic objectives. It is
supportive in nature, in that they provide service or assistance to line positions or to other parts
of the organization.
Controller – is the manager in charge of the accounting department. He is a member of the top-
management and an active participant in the planning, control, and decision making
processes.
Accounting information – is essentially financial in nature, helping the manager to do three things:
1. Plan effectively and focus attention on deviations from plans
2. Direct day-to-day operations
3. Arrive at the best solutions to the operating problems faced by the organization
Financial accounting vs. Managerial accounting
Differences
1. Managerial accounting focuses on providing data for internal uses by the manager.
2. Managerial accounting places much more emphasis on the future.
3. Managerial accounting is not governed by generally accepted accounting principles.
4. Managerial accounting emphasizes the relevance and flexibility of data.
5. Managerial accounting places less emphasis on precision and more emphasis on
nonmonetary data.
6. Managerial accounting emphasizes the segments of an organization, rather than just looking at
the organization as a whole.
7. Managerial accounting draws heavily from other disciplines.
8. Managerial accounting is not mandatory.
PRIME JOHNSON V. FELICIANO, CPA Page 1 of 4

Similarities
1. Both rely on the accounting information system.
2. Both rely heavily on the concept of responsibility and stewardship.
COST CONCEPTS AND CLASSIFICATION
Cost – reflects the monetary measure of resources given up to attain an objective such as
acquiring a good or service.
Expense – is the portion of an asset’s value consumed or sacrificed during a period.
Different cost classifications:

1. As to function – e.g., cost of sale, distribution cost, administrative cost, finance cost.
2. As to nature – e.g., employee benefits, depreciation and amortization
3. As to behavior – fixed cost, variable cost, mixed cost.
4. As to traceability to cost objects – direct or indirect
5. Relevant cost and Irrelevant cost
6. Controllable and non controllable cost
7. Direct and indirect departmental cost
8. Opportunity and imputed cost
9. Out-of-pocket cost and non-cash cost
10. Sunk cost and future cost
11. Incremental cost and marginal cost
Cost Behavior
MAHAL Co. has the following data:
Total fixed cost ……………………………………P200,000

Variable cost per unit……………………………… 20
What will happen to fixed cost and variable costs, per total and per unit, if production and sales
are zero, 5,000 units, 10,000 units, and 15,000 units.
Production Total fixed Total variable Unit fixed Unit variable Total cost Total unit
cost cost cost cost cost
0
5,000
10,000
15,000
Costs Fixed costs Variable costs

Total cost Constant, regardless of levels of Changes, in direct proportion to
production and sales the change in the level of
production and sales
Unit costs Changes, decreases as Constant, regardless of levels of
production increases and vice- production and sales
versa
FRANCKLINE C. BANIQUED, CPA Page 2 of 4

Mixed Costs – are costs that could not be perfectly classified as pure fixed costs or pure
variable costs. It could either be semi-variable costs, semi-fixed costs, or step
costs.
Relevant range assumption– is a band of activity where the behavior of costs, expenses and
revenues is valid. That is total fixed cost is constant and total variable cost changes.
Time assumption – states that the cost behavior patterns identified are true only over a specific period
of time. Beyond this, the cost may show a different behavior.
SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS.
Basic formula:
Y = a + bx
Where: Y – total cost

a – fixed cost
b – variable cost
x – level of activity
HIGH-LOW METHOD – the principle used in this method resides on the assumption that any change
in total cost is attributable to the change in variable cost.
Formula:
b = Cost at High activity level – Cost at Low activity level or Change in total costs
High activity level – Low activity level Change in activity level
MAHAL Co. provided the following information:
Month Machine Hours Utility Cost

January 4,800 P 192.00
February 9,000 350.00
March 18,000 452.00
April 4,900 186.00
May 4,600 218.00
June 8,900 347.00
July 5,900 248.00
August 5,500 231.00
Required: Compute for the fixed cost and variable cost.

If the company expects to use 9,100 machine hours in September, how much is the budgeted
utility cost in September?

SCATTERGRAPH METHOD – plots observation on a graph and draws conclusion on the
relationships depicted by such observations. This method uses the principles found in a
regression line. A regression line is a straight line that depicts the relationship of two variables
– one is independent and the other is dependent.
MAHAL Co. is analyzing the fixed and variable components of its materials handling cost in relation to
number of shipments received. The following data were taken from the historical records of the
company:
Months No. of Materials Months No. of Materials

shipment handling cost shipment handling cost
received received
January 50 P45,000 July 45 P45,000
February 60 52,000 August 55 54,000
March 90 70,000 September 65 50,000
April 70 55,000 October 80 60,000
May 40 37,000 November 75 58,000
June 60 58,000 December 70 60,000
Using the scattergraph technique, compute the fixed costs and the variable cost rate
THE LEAST-SQUARES METHOD – this method extends the regression line to the other
quadrant in the wholistic quadrant analysis.
Formulas: Equation 1: Y = a + bx
Equation 2: ΣY = na + bΣx
Equation 3. ΣxY = aΣx + bΣx²
The chief finance officer of MAHAL Co. is analyzing the relationship of its electricity costs and the
number of batches produced. The following data are assembled for this purpose.
Months No. of batches Electricity cost Months No. of batches Electricity cost
January 4 P22,000 May 3 P21,500
February 7 30,000 June 6 29,000
March 5 25,000 July 8 36,000
April 2 15,000
Determine the total fixed cost and variable cost rate of electricity using the least-squares method.

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NORTHEASTERN COLLEGE

Villasis, Santiago City

COLLEGE OF ACCOUNTANCY AND BUSINESS ADMINISTRATION

Strategic planning – is the implementation of an organization’s objectives.

Decentralization – means the delegation of decision making authority throughout an organization by

Line and staff relationships

Financial accounting vs. Managerial accounting

PRIME JOHNSON V. FELICIANO, CPA Page 1 of 4

COST CONCEPTS AND CLASSIFICATION

Expense – is the portion of an asset’s value consumed or sacrificed during a period.

Different cost classifications:

MAHAL Co. has the following data:

Total fixed cost ……………………………………P200,000

Costs Fixed costs Variable costs

FRANCKLINE C. BANIQUED, CPA Page 2 of 4

SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS.

Where: Y – total cost

MAHAL Co. provided the following information:

Month Machine Hours Utility Cost

Required: Compute for the fixed cost and variable cost.

FRANCKLINE C. BANIQUED, CPA Page 3 of 4

Months No. of Materials Months No. of Materials

FRANCKLINE C. BANIQUED, CPA Page 4 of 4

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