Manager’s Three Responsibilities

Regardless of the type and size

of the organization they manage, all
~Prelims~ managers perform the same basic
functions. These three basic functions
CPA Board Exam Syllabus are planning, directing, and controlling.
Integrated throughout these
The CPA Licensure Examination responsibilities is decision making
Syllabus Management Services (identifying alternative courses of action
(Effective October 2022 Examination) and choosing among them).
1.0 Management Accounting
2.0 Financial Management
3.0 Economic Concepts Essential to
Obtaining an Understanding of
Entity’s Business and Industry

Lesson 01: Management Accounting:

Basic Framework

Introduction

Management is expected to
ensure that the organization uses its
resources wisely, operates profitably, Decision Making
pays its debts, and abides by laws and ➢ Planning
regulations. To fulfill these expectations, ➢ Directing
managers establish the goals, ➢ Controlling
objectives, and strategic plans that ➢ Feedback
guide and control the organization’s
operating, investing, and financing
activities.
✓ Planning involves setting goals
To plan and control an and objectives for the company
organization’s operations, to measure its and determining how to achieve
performance, and to make decisions them.
about products or services and many ✓ It is the future-oriented part of the
other internal control and governance management cycle. The first step
matters, managers need accurate and in planning is to establish goals
timely accounting information. or objectives, along with the
tactics that will be used to
achieve those goals.
 ✓ Managers have to make a variety : “Short-term
of “who, what, when, where and goals that outline expectations for
how” decisions as they plan. performance of day-to-day operations.”
Overview of the Planning Framework : “A comprehensive
statement of how the company will
achieve its objectives.”

: “Expressions of the business

plan in financial terms.”

✓ Directing means overseeing the

company’s day-to-day operations.
Management uses sale and
distribution channel, to run daily
business operations.
✓ This means putting the plan into
action. During this phase, the
managers must lead, direct, and
motivate others to achieve the
objectives set in the planning
stage.
: “To increase the value of
✓ The decisions made during the
stakeholders’ interest in the business.” implementation phase are
sometimes called
: “Fundamental way in which
OPERATIONAL DECISIONS.
the company will achieve the goal of
increasing stakeholders’ value.”

: “Broad, long-term ✓ The managerial activity of

goals that determine the fundamental monitoring a plan’s
nature and direction of the business and implementation and taking
that serve as a guide for decision corrective action as needed is
making.” referred to as controlling. Control
is usually achieved by comparing
: “Mid-term goals actual performance. This
for positioning the business to achieve information can be used to evaluate
its long-term strategies.” or to correct the steps being taken to
implement a plan
✓ Based on the feedback, a
manager (or worker) may decide
 to let the plan continue as is, take How Accounting Facilitates Planning
corrective action of some type to and Control
put the actions back in harmony
with the original plan, or do some
midstream re-planning.

These functions are part of a

continuous or ongoing cycle. Managers
must make a variety of decisions, and
the managerial accounting system must
provide information to help them make
those decisions.

What is Management Accounting?

What do we mean by
management accounting? Quite simple,
MANAGERIAL ACCOUNTING is the
provision of accounting information for
company’s internal users. It is the firm’s Management Decisions at the
internal accounting system and is Sporting News
designed to support information need of
managers. Planning

Unlike financial accounting, • Increase advertising rates by 4%.

managerial accounting is not bound by Control
any formal criteria such as IFRS
(International Financial Reporting ❖ Action
Standards). • Implement a 4% increase in
advertising rates.
Managerial accounting has three broad
❖ Performance Evaluation
objectives:
• Advertising revenues 5.4% lower
✓ To provide information for than budgeted.
planning the organization’s
Management Accounting System
actions.
✓ To provide information for Budgets
controlling the organization’s
actions. • Expected advertising pages sold.
✓ To provide information for making Rates per page, and revenue.
effective decisions. • Financial representations of
plans.
Accounting System

• Source documents (invoices to

advertisers and payments A company’s strategy specifies
received). how the organization matches its own
• Recording in general and capabilities with the opportunities in the
subsidiary ledgers. marketplace. In other words, strategy
• Recording transactions and describes how an organization creates
classifying them in accounting value for its customers while
records. distinguishing itself from its competitors.
A business might be thought to follow
Performance Reports one or two broad strategies: (1) Cost
Leadership Strategy and (2) Product
• Actual advertising pages sold,
Differentiation Strategy.
average rate per page, and
revenue. Deciding between these
• Reports of actions comparing strategies is a critical part of what
budgets with actual results. managers do. Management
accountants’ work closely with
Sample Performance Report
managers in various departments to
formulate strategies by providing
information about the sources of
competitive advantage, such as (1) the
company’s cost, productivity, or
efficiency advantage relative to
competitors; or (2) the premium price a
company can charge over its costs from
distinctive product or services features
In 2008, the Institute of Management
Accountants (IMA) updated the
definition of management accounting as
follows:
Financial Accounting
“Management accounting is a
profession that involves partnering in ✓ The objective of financial
management decision making, devising accounting is to provide useful
planning and performance management information to external parties,
systems, and providing expertise in including investors and creditors.
financial reporting and control to assist Financial accounting requires
management in the formulation and compliance with the applicable
implementation of an organization’s financial reporting framework
strategy.” such as IFRS.
 ✓ Financial accounting information Summarizes the Differences Between
is typically historical, quantitative, Financial and Management
monetary, and verifiable. Such Accounting
information usually reflects
activities of the whole
organization. Publicly held
companies are required to have
their financial statements audited
by an independent auditing firm.

Managerial Accounting

✓ Management accounting is used to

gather the financial and non-
Sample Managerial Report for
financial information needed by
Different Operating Segments
internal users. Managers are
concerned with fulfilling corporate
goals, communication and
implementing strategy, and
coordinating product design,
production, and marketing while
simultaneously operating distinct
business segments.
✓ Management accounting
information commonly addresses
individual or divisional concerns
rather than those of the firm as a
whole. Management accounting is
not required to adhere to IFRS but
provides both historical and
forward-looking information for
managers. ✓ Cost Accounting can be viewed as
the intersection between financial
and management accounting. Cost
accounting addresses the
informational demands of both
financial and management
accounting by providing product
cost information to;
• External Parties (stockholders,
creditors, and various
 regulatory bodies) for The Skills Required of Management
investment and credited Accountants
decisions and for reporting
purposes, and ✓ Since management accountants
work in a professional advisory
• Internal Managers for planning,
role, they need a vast array of
controlling, decision making
skills. Some of these skills are
and evaluating performances.
technical, whereas other are
Shows Relationship of Financial, nontechnical competencies, which
Management, and Cost Accounting are often referred to as “soft-skills”.
✓ A recent survey of management
accounting professionals revealed
some of the top skills they need to
help their organizations achieve
success. Exhibit 1-6 summarizes
some of these competencies.

When you think of accountants, what do

you picture?

Summarizes the “Old Perception

Lesson 02: Building Blocks of
versus the Reality”.
Managerial (Management)
Accounting

Introduction

Managers must understand basic

managerial accounting terms and
concepts before they can use the
information to make good decisions.
This terminology provides the common
ground through which managers and
accountants communicate. Without a
common understanding of these
concepts, managers may ask for (and
accountants may provide) the wrong ✓ Retailers sell to consumers like
information for making decisions. you and me. Wholesalers, often
referred to as "middlemen," buy
Different types of costs are useful for
products in bulk from
different purposes. Both managers and
manufacturers, markup the
accountants must have a clear
understanding of the types of costs that prices, and then sell those
are relevant to the decision at hand. products to retailers.
✓ Because merchandising
companies are in business to sell
tangible goods, they carry a
substantial amount of inventory.
✓ The cost of inventory includes
the cost merchandisers pay for
✓ Service companies are in the goods plus all costs
business to sell intangible necessary to get the
services-such as health care, merchandise in place and ready
insurance, banking, and to sell, such as freight-in costs
consulting. Because these types and any import duties or tariffs
of companies sell services, they paid on merchandise purchased
generally don't carry inventory. from overseas suppliers.
✓ Some service providers carry a ✓ A merchandiser's balance
minimal amount of supplies sheet has just one inventory
inventory; however, this inventory account called "Inventory" or
is typically used for internal "Merchandise Inventory." Besides
operations-not sold for profit. incurring inventory-related costs,
Service companies incur costs to merchandisers also incur costs
provide services, advertise, and to operate their retail stores
develop new services. and websites, advertise, research
✓ For many service providers, new products and new store
salaries and benefits make up the locations, and provide customer
majority of their costs. service.

✓ Merchandising companies ✓ Manufacturing companies use

such as Walmart and Best Buy labor, plant, and equipment to
resell tangible products they convert raw materials into new
buy from manufacturers and finished products. Manufacturers
suppliers. Merchandising carry three types of inventory:
companies include retailers (such • Raw materials inventory: All
as Walmart) and wholesalers. raw materials that will be
 used in manufacturing. ✓ Different models (the Prius, Rav4,
Toyota's raw materials include and Corolla)
steel, glass, tires, upholstery ✓ Alternative marketing strategies
fabric, engines, and other (television advertising,
automobile components. They sponsorship of athletic events)
also include other physical ✓ Geographic segments of the
materials used in the plant, business (United States, Europe,
such as machine lubricants Japan)
and janitorial supplies. ✓ Departments (human resources,
• Work in process inventory: R&D, legal)
Goods that are partway ✓ Sustainability initiatives ("Toyota
through the manufacturing Together Green" conservation
process but not yet complete. programs)
At Toyota, the work in process
Costs are classified as either direct or
inventory consists of partially
indirect with respect to the cost object.
completed vehicles.
• Finished goods inventory: A direct cost is a cost that can be
Completed goods that have not traced to the cost object, meaning
yet been sold. Toyota is in the company can readily identify or
business to sell completed cars, associate the cost with the cost
not work in process. Once the object.
vehicles are completed, they An indirect cost, in contrast, is a
are no longer considered cost that relates to the cost object
work in process, but rather they but cannot be traced specifically to
become part of finished goods it. Think of an indirect cost as a
inventory. cost that is jointly used or shared
by several cost objects.

If a company wants to know the total

cost attributable to a cost object, it must
assign all direct and indirect costs to the
cost object. Assigning a cost simply
means that you are "attaching" a cost to
the cost object.

A cost object is anything for which

managers want to know the cost. Cost
objects may include the following:

✓ Individual units
 inventory, is treated as a period
Assign direct and indirect
cost.
costs to cost objects
• While accountants refer to these
Trace diurect costs Allocate indirect costs as "period costs," most other
objects costs to cost objects people refer to them as "operating
expenses" or "selling, general,
Amount of cost Amount of cost assigned to administrative expenses, and
assigned to the cost the cost object is less
object is very precise precise finance costs."

For external reporting

purposes, IFRS requires that certain
costs of the company be attached, or
assigned, to units of product in
inventory, while other costs are treated
as operating expenses of the period.

• These are the costs incurred by

manufacturers to produce their
products or incurred by merchandisers
to purchase their products.
Merchandising companies'
product costs include only the cost of
purchasing the inventory from suppliers
• These are the costs incurred by the plus any costs incurred to get the
company that do not get treated as merchandise to the merchandiser's
inventory, but rather, are expensed place of business and ready for sale.
immediately in the period in which Typically, these additional costs include
they are incurred. freight-in costs and import duties or
• These costs do not relate to tariffs, if the products were purchased
manufacturing or purchasing from overseas.
product. Rather, they include
costs incurred in every other
function of the value chain,
including R&D, design,
marketing, distribution, and
customer service. In essence, any
cost that is not treated as
 the factory. Manufacturing overhead
has three components: indirect
materials, indirect labor, and
Manufacturing companies' other indirect manufacturing costs.
product costs include only those costs 1. Indirect Materials include
related to producing, or manufacturing, materials used in the plant that
their products. Manufacturers incur are not easily traced to
three types of manufacturing costs when individual units. For example,
making a vehicle: direct materials, direct indirect materials often include
labor, and manufacturing overhead. janitorial supplies, oil and
lubricants for the machines,
and any physical components
of the finished product that are
very inexpensive.
2. Indirect Labor includes the cost
of all employees working in the
plant other than those
✓ Manufacturers convert raw employees directly converting
materials into finished products. the raw materials into the
Direct materials are the primary finished product.
materials that become a physical 3. Other indirect manufacturing
part of the finished product. costs include such plant-
related costs as depreciation
on the plant and plant
equipment, plant property
✓ Direct labor is the cost of
taxes and insurance, plant
compensating employees who
repairs and maintenance, and
physically convert raw materials into
plant utilities. Indirect
the company's products.
manufacturing costs have
grown tremendously in recent
years as manufacturers
automate their plants with
✓ Manufacturing overhead includes all the latest advanced
manufacturing costs other than manufacturing technology.
direct materials and direct labor. In
other words, manufacturing
overhead includes all indirect
manufacturing costs.
✓ Manufacturing overhead is also
referred to as factory overhead
because all of these costs relate to
 Merchandising Companies:

Managers and accountants

sometimes talk about certain
combinations of manufacturing costs.

❖ Prime costs refer to the

combination of direct materials and
direct labor. Prime costs used to be
the primary costs of production.
However, as companies have
Manufacturing Companies:
automated production with
expensive machinery,
manufacturing overhead has
become a greater cost of
production.
❖ Conversion costs refer to the
combination of direct labor and
manufacturing overhead. These are
the costs of converting raw
materials into finished goods. In order to calculate Cost of
Goods Sold, a manufacturer must first
figure out the amount of direct material
s used and the Cost of Goods
Manufactured.

Service Companies:

Step 1: Calculate the cost of the direct

materials used during the year.
Step 2: Calculate the cost of goods relevant range. Within the relevant
manufactured. range, the two extreme cost behaviors
are variable and fixed.

Step 3: Calculate the cost of goods

sold.

A variable cost is one that

increases in total as output increases
and decreases in total as output
decreases.

To manage costs, accountants A cost that varies in total

must understand how total (rather than proportionately with activity is a variable
unit) cost behaves relative to a change cost. Accordingly, a variable cost is a
in a related activity measure. Common constant amount per unit.
activity measures include production
volume, service and sales volumes,
hours of machine time used, pounds of A fixed cost is a cost that does
material moved, and number of not increase in total as output increases
purchase orders processed. and does not decrease in total as output
decreases.
Every organizational cost will
change if sufficient time passes or if an Comparative Total and Unit Cost
extreme shift in activity level occurs. Behavior Definitions:
Thus, to properly identify, analyze, and
use cost behavior information, a time
frame must be specified to indicate how
far into the future a cost should be
examined and a particular range of
activity must be assumed.

The assumed range of activity

that reflects the company’s normal
operating range is referred to as the
Variable Cost
 - Total cost varies in direct to eight, and so forth as the number
proportion to changes in activity. of firefighter’s increases. The
- Unit cost is constant throughout supervisors’ salaries represent a
the relevant range. step cost.

Fixed Cost

- Total cost remains constant

throughout the relevant range. ➢ Beginning Raw Materials +
- Unit cost varies inversely with Purchases – Ending Raw Materials
changes in activity throughout the = Direct Materials
relevant range. ➢ Direct Materials + Direct Labor
Costs + Manufacturing Overhead =
COST BEHAVIOR PATTERNS Total Manufacturing Cost
➢ Total Manufacturing Cost +
Beginning Work in Process (WIP)
Inventory – Ending WIP Inventory
= Cost of Goods Manufactured

✓ Four aspects of cost behavior

complicate the task of classifying
costs into fixed and variable
categories.
✓ First, not all costs are strictly fixed
or variable. For example, electric ➢ Purchases [Less: (Purchases
utility costs may be based on a fixed Discount + Purchases Return and
minimum monthly charge plus a Allowance)] = Net Purchases
variable cost for each kilowatt-hour. ➢ Net Purchases + Freight In = Net
Such semi-variable cost has both Cost of Purchases
fixed and variable components. ➢ Net Cost of Purchases +
Semi-variable costs, also called, Beginning Inventory = Goods
mixed costs. Available for Sale
✓ Second, some costs increase with ➢ Goods Available for Sale – Ending
volume in “steps.” Step Costs, also Inventory = Cost of Goods Sold
called semi-fixed costs, For
example, one supervisor might be
needed for up to four firefighters in a
fire station, two supervisors for five
 • Plan A cost Php80 per month while
Plan B cost (1,700 x 0.20) + (1,600
x 0.10) = Php500 per month
• Plan A cost Php80 per month while
Plan B cost (3,400 x 0.20) + (3,200
x 0.10) = Php1,000 per month
• My sister should use the Plan A in
order to save money.

➢ Beginning WIP Inventory + Problem #3

Manufacturing Cost – COGM =
Ending WIP Inventory

Computation for FOH

Practice Problems

Problem #1
Answer:

• V
• F
• V
• V
Answer: • F
• F
• FO
• SA Problem #4
• DL
• DM
• FO
• DL

Problem #2
Answer:

• I
• D
• I
• I
Answer: • D
Problem #5

Answer:

Answer:

• DM
• FO Ending WIP Inventory = Php29,700
• DL Problem #8
• DM
• FO Compute the total manufacturing cost
• DM for a manufacturer with the following
information for the month.
Problem #6

Answer:

Answer:

• PROD
• PER
• PROD Manufacturing Cost = Php86,900
• PER Problem #9
• PROD
• PER Compute cost of goods sold using the
• PER following information.
• PROD

Problem #7

Compute ending work in process Answer:

inventory for a manufacturer with the
following information.
 Problem #12

3M Co. reports beginning raw materials

inventory of Php855 million and ending
COGS = Php3,750 raw materials inventory of Php717
million. If 3M purchased Php3,646
Problem #10 million of raw materials during the year,
what is the amount of raw materials it
Compute cost of goods sold using the
used during the year?
following information.
Answer:

Answer:

Raw Material Used = Php3,784 million

of raw material during the year

Problem #13
COGS = Php980,100
Nestlé reports beginning raw
Problem #11 materials inventory of 3,815 and
ending raw materials inventory of
Use the following information to
3,499 (both numbers in millions of
compute the cost of direct materials
Swiss francs). If Nestlé purchased
used for the current year. Assume the
13,860 (in millions) of raw materials
Raw Materials Inventory account is used
during the year, what is the amount of
only for direct materials.
raw materials it used during the year?

Answer:

Raw Material Used = Php14,176 million

Answer: of raw material during the year

Problem #14

Listed here are product costs for the

production of soccer balls. Classify each
Direct Materials = Php122,000 cost (a) as either variable (V) or fixed (F)
and (b) as either direct (D) or indirect (I).
What patterns do you see regarding the • FI
relation between costs classified in • VD
these two ways?
Problem #16

Tesla, a vehicle manufacturer, incurs the

following costs. (1) Classify each cost as
either a product (PROD) or period (PER)
cost. If a product cost, identify it as direct
materials (DM), direct labor (DL), or factory
overhead (FO), and then as a prime (PR) or
Answer: conversion (CONV) cost. (2) Classify each
product cost as either a direct cost (DIR) or
1. VD
an indirect cost (IND) using the product as
2. FI
the cost object.
3. VD
4. VD
5. VD
6. FI
7. FI

Problem #15

TechPro offers instructional courses in Answer:

e-commerce website design. The 1. I PROD FO CONV
company holds classes in a building that 2. I PER
it owns. Classify each of TechPro’s 3. I PROD FO CONV
costs below as (a) variable (V) or fixed 4. D PROD DM PR
(F) and (b) direct (D) or indirect (I). 5. I PER
Assume the cost object is an individual 6. D PROD DL PR
class.
Problem #17

Compute cost of goods sold for each of

these two companies for the year.

Answer:

• FI
• FD
• VD
• VI
Answer:
Problem #18

Using the following data from both

Garcon Company and Pepper Company
for the year ended December 31, 2019;
compute (1) the cost of goods
manufactured and (2) the cost of goods
sold.

Answer:

• PER SE
• PER GA
• PER SE
• PROD FO
• PROD FO
• PROD FO
• PROD FO
• PROD DL
• PROD FO
• PROD FO
Answer: • PER GA
• PROD DM
• PER GA
• PER SE
• PROD FO
• PROD FO
• PRE SE
• PRE SE

Problem #20
Problem #19
Racer’s Edge makes specialty skates
The following calendar year-end
for the ice skating circuit. At year-end,
information is taken from the December
the company had (a) 1,500 skates in
31, 2019, adjusted trial balance and
finished goods inventory and (b) 2,500
other records of Leone Company.
blades at a cost of Php20 each in raw
materials inventory. During the year,
Racer’s Edge purchased 45,000 manufactured for Business Solutions for
additional blades atPhp20 each and the month ended January 31, 2020.
manufactured 20,750 pairs of skates. Assume the following manufacturing
costs:

Answer:

Answer:

Problem #23
Problem #21 The following calendar-year information
Santana Rey, owner of Business is taken from the adjusted trial balance
Solutions, decides to diversify her and other records of Dahlia Company.
business by also manufacturing
computer workstation furniture. Classify
the following manufacturing costs of
Business Solutions as either (a) variable
(V) or fixed (F) and (b) direct (D) or
indirect (I).

Answer:

Problem #22

Santana Rey, owner of Business

Solutions, decides to diversify her
business by also manufacturing
computer workstation furniture. Prepare
Answer:
a schedule of cost of goods
Problem #24

HYT Corporation operates an

automobile service facility, which
specializes in replacing mufflers in cars.
The following table shows the cost
incurred during the month when 750
mufflers were replaced.

Answer:

Problem #25

Answer:
 ~MIDTERMS~ manuals and the experience of
computer technicians. Other costs are
Lesson 03: Cost Segregation and estimated similarly; for example, the
Estimation size and cost of the building needed to
house the reception and service
operation can be estimated based on
The most important characteristic area rental costs and space
of costs for decision making is how they requirements.
behave how they vary with activity is the
One advantage to the
key distinction for decision making.
engineering approach is that it can detail
Therefore, the basic idea in cost
each step required to perform an
estimation is to estimate the relation
operation. This permits comparison with
between costs and the variables
other centers in which similar operations
affecting costs, the cost drivers. Building
are performed and enables the
on that, the formula that we use to
company to review its productivity and
estimate costs is the familiar cost
identify specific strengths and
equation:
weaknesses. Another advantage to this
approach is that it does not require data
from prior activities in the organization.
Where TC refers to total costs, F Hence, it can be used to estimate costs
refers to fixed costs that do not vary for totally new activities.
with activity levels, V refers to variable
costs per unit of activity, and X refers to A company that uses engineering
the volume of the activity. estimates often can identify where
“slack” exists in its operations. For
example, if an engineering estimate
indicates that 4,000 square feet of floor
area are required for an assembly
process, but the company has been
renting 6,000 square feet in other
Cost estimate based on centers, the company might find it
measurement and pricing of the work beneficial to rearrange the plan to make
involved in a task. An engineering floor space available for other uses or
estimate is based on detailed plans look for smaller rental space.
and is frequently used for large
A difficulty with the engineering
projects or new products.
approach is that it can be quite
Engineering estimates of the expensive to use because it analyzes
supplies required for typical repairs each activity involved in the business.
can be obtained from manufacturers’
 The observation method, also Engineering estimates often omit
called the account analysis method, inefficiencies, such as downtime for
relies heavily on the ability of an unscheduled maintenance,
observer to detect a pattern of cost absenteeism, and other miscellaneous
behavior by reviewing past cost and random events that affect all firms.
volume data. The reaction of an
expense to past changes in production Account analysis is often based
is observed, and a decision is made to on last period's costs alone and is
treat the expense as either a variable subject to managers focusing on
cost or a fixed cost, depending on which specific issues of the previous period
type of cost behavior it more closely even though these might be unusual
resembles. The identification depends and infrequent
on the accountant's judgment and One approach to dealing with
experience. both random and unusual events is to
The analyzed overhead item use several periods of operation or
would thereafter be treated as either a several locations as the basis for
variable or fixed cost, ignoring the fact estimating cost relations. This can be
that many overhead costs are semi- done by applying statistical theory,
variable. For example, electricity which allows for random events to be
expense would be classified as a separated from the underlying relation
variable cost if the majority of the between costs and activities.
kilowatt hours used were for powering
the machines rather than for heating
and lighting the factory. The scattergraph method
estimates a straight line along which the
Cost Estimation Using Account semi-variable costs will fall. The cost
Analysis-3C being analyzed is plotted on the y-axis
of the graph, and the activity level, such
as the number of units produced, is
plotted on the x-axis. After the past
observations of cost and production
data are plotted on graph paper, a line is
drawn by visual inspection representing
the trend shown by most of the data
points.

Engineering estimates and Usually an equal number of data

account analysis are valuable points fall above and below the line. The
approaches to estimating costs, but point where the straight line intersects
they have important limitations. the y-axis represents the total fixed
costs. The variable cost per unit is
computed by subtracting fixed costs
from total costs at any point on the
graph and then dividing by the activity
level for that point read from the x-axis.

The least-squares regression

method, unlike the high-low method,
uses all of the data to separate a mixed
cost into its fixed and variable
components.

A regression line of the form

is fitted to the data,
where a (the intercept) represents the
total fixed cost and b (the slope)
represents the variable cost per unit of
activity. This method simply computes
The high-low method compares
the regression line that minimizes the
a high production volume and its
sum of these squared regression errors.
related cost to a low production
While the basic idea underlying least-
volume with its related cost. The
squares regression analysis is pretty
difference in volume between the two
simple, the formulas that calculate a (the
points being compared is linear and will
intercept) and b (the slope) are quite
fall along a straight line.
complex as shown below:
The slope of the total cost line,
which estimates the increase in variable
costs associated with an increase of one
unit of activity, can be estimated using
the following equation:

The intercept is estimated by

taking the total cost at either activity
level and subtracting the estimated
variable cost:

Illustrative Problem
 Copper Mountain Company has SCATTERGRAPH METHOD
accumulated the following data over a
six-month period:

Required: LEAST-SQUARES REGRESSION

METHOD
Separate the indirect labor into its fixed
and variable components, using the
following method:

✓ High-low method
✓ Scattergraph method
✓ Least-squares regression method

Answers:

HIGH-LOW METHOD
Lesson 04: COST VOLUME PROFIT available to cover fixed costs and to
ANALYSIS provide income from operations. The
contribution margin ratio is computed as
follows:
Cost-volume-profit analysis is
the examination of the relationships
among selling prices, sales and
production volume, costs, expenses, The contribution margin ratio is
and profits. Cost volume profit analysis most useful when the increase or
is useful for managerial decision decrease in sales volume is measured
making. Some of the ways cost volume- in peso sales.
profit analysis may be used include:

1. Analyzing the effects of changes in

selling prices on profits The unit contribution margin is
2. Analyzing the effects of changes in also useful for analyzing the profit
costs on profits potential of proposed decisions. The unit
3. Analyzing the effects of changes in contribution margin is computed as
volume on profits follows:
4. Setting selling prices
5. Selecting the mix of products to sell
6. Choosing among marketing The unit contribution margin is
strategies most useful when the increase or
decrease in sales volume is measured
in sales units (quantities).
Contribution margin is
especially useful because it provides
insight into the profit potential of a
company. Contribution margin is the The mathematical approach to
excess of sales over variable costs, as cost-volume-profit analysis uses
shown below. equations to determine the following:

✓ Sales necessary to break even

✓ Sales necessary to make a target
or desired profit
The contribution margin can
also be expressed as a percentage. The
contribution margin ratio, sometimes The break-even point is the level
called the profit-volume ratio, indicates of operations at which a company's
the percentage of each sales dollar revenues and expenses are equal. At
break-even, a company reports neither profit. By modifying the break-even
an income nor a loss from operations. equation, the sales required to earn a
The break-even point in sales units is target or desired amount of profit may
computed as follows: be computed. For this purpose, target
profit is added to the break-even
equation as shown below.

Changes in fixed costs affect the

break-even point as follows:

✓ Increases in fixed costs increase

the break-even point. Cost-volume-profit analysis can
✓ Decreases in fixed costs be presented graphically as well as in
decrease the break-even point. equation form. Many managers prefer
the graphic form because the operating
profit or loss for different levels of sales
can readily be seen
Changes in unit variable costs
affect the break-even point as follows:

✓ Increases in unit variable costs

A cost-volume-profit chart,
increase the break-even point.
sometimes called a break-even chart,
✓ Decreases in unit variable costs graphically shows sales, costs, and the
decrease the break-even point. related profit or loss for various levels of
units sold. It assists in understanding
the relationship among sales, costs, and
operating profit or loss.
Changes in the unit selling price
affect the break-even point as follows:

✓ Increases in the unit selling price

decrease the break-even point.
✓ Decreases in the unit selling price
increase the break-even point.

At the break-even point, sales

and costs are exactly equal. However,
the goal of most companies is to make a
 The preceding break-even analysis is
Many companies sell more than
verified by the following income
one product at different selling prices.
statement:
In addition, the products normally have
different unit variable costs and thus
different unit contribution margins. In
such cases, break-even analysis can
still be performed by considering the
sales mix. The sales mix is the relative
distribution of sales among the products
sold by a company.

To illustrate, assume that Burr

Company sold Products A and B during
the past year as follows: The relationship of a company's
contribution margin to income from
operations is measured by operating
leverage. A company's operating
leverage is computed as follows:

For break-even analysis, it is

useful to think of Products A and B as
components of one overall enterprise The margin of safety indicates
product called E. The unit selling price the possible decrease in sales that may
of E equals the sum of the unit selling occur before an operating loss results.
prices of each product multiplied by its Thus, if the margin of safety is low, even
sales mix percentage. a small decline in sales revenue may
result in an operating loss. The margin
of safety may be expressed in the
following ways:

The break-even point of 8,000

units of E can be determined in the
normal manner as shown below.
 ~SEMI-FINALS~ the functional nature of business
operations, such as COGS and
Lesson 05: Absorption vs. Variable operating expenses.
Costing

Under variable (direct) costing,

Under the traditional costing only costs that change in total with
approach, all manufacturing costs, changes in production level are included
(REGARDLESS WEATHER THEY ARE in product costs.
VARIABLE OR FIXED) are assigned to
products. These costs consist of direct Those consist of direct materials,
materials, direct labor, variable direct labor, and variable overhead.
overhead, and fixed overhead.
The overhead cost that does not
This traditional approach is change with changes in production is
referred to as absorption (full or fixed overhead-and, thus, is excluded
conventional) costing, which assumes from product costs.
that products absorb all costs incurred
Instead, fixed overhead is treated
TO PRODUCE them.
as a period cost; meaning it is expensed
in the period when it is incurred.

Absorption Costing Income

Statement

Variable Costing Income Statement

The absorption income statement

is premised on the generally accepted
accounting principles or IFRS. It
classifies costs and expenses based on
Expanded Version: Variable Costing : Variable Costing with
Income Statement Absorption Costing Income

Note:

The variable income statement is FOH / Unit = Fixed Factory Overhead /

premised on the philosophy that costs Capacity * Normal – Budgeted – Actual
are either fixed or variable.

The variable costing income

statement is NOT in accordance with The average production level of
the established financial reporting the business over a long range of time.
standards. Assume the following information:

*estimated

The normal capacity of the business is

_____________.

It is PREFERRED to be used as
a DENOMINATOR in computing the
FIXED OVERHEAD and FIXED
ADMINISTRATIVE AND SELLING
EXPENSES. However, the FIXED
EXPENSES are TRADITIONALLY
determined using the NUMBER OF
UNITS SOLD.
Capacity / Volume Variance for Assume direct labor is a variable cost.
Absorption Costing

Problem #2
Presentation of Capacity Variance
Legaz Company, which has only
one product, has provided the following
data concerning its most recent month
of operations:

Problem #1

HJ Turner Corporation produces

a single product. Data concerning the
company’s operations last year appear
below:

Problem #3

Magnani Company, which has

only one product, has provided the
following data concerning its most
recent month of operations:
 Hanks Company produces a
single product. Operating data for the
company and its absorption costing
income statements for the last two years
are presented below:

Problem #4

Duif Company’s absorption

costing income statements for the last
two years are presented below.
Problem #6

Pacher Company, which has only

one product, has provided the following
data concerning its most recent month
of operations:

Problem #5
Problem #7

Qasimi Company, which has only

one product, has provided the following
data concerning its most recent month
of operations:

Problem #9

Netro Company, which has only

one product, has provided the following
data concerning its most recent month
of operations:

Problem #8

Italia Espresso Machina Inc.

produces a single product. Data
concerning the company’s operations
last year appear below:

Problem #10
 Oakford Company, which has Lesson 06: The Budgeting Process;
only one product, has provided the Overview
following data concerning its most
recent month of operations:
✓ It is the process of identifying,
gathering, summarizing, and
communicating financial and non-
financial information about an
organization's future activities.
✓ It is an essential part of the
continuous planning that an
organization must do to accomplish
its long-term goals. The budgeting
process provides managers of all
types of organizations-including
for-profit organizations and not-for-
profit organizations-the opportunity
to match their organizational goals
Problem #11 with the resources necessary to
accomplish those goals.
Vitamin T-shirt, Inc. budgeted the
following costs for its first year of
manufacturing operations. These costs ✓ These are plans of action based
are based on a volume of 50,000 T- on forecasted transactions,
shirts produced and sold: activities, and events-are
synonymous with managing an
organization. They are essential to
accomplishing the goals
articulated in an organization's
strategic plan.
✓ They are used to communicate
information, coordinate activities
and resource usage, motivate
employees, and evaluate
performance,
✓ For example, a board of directors
may use budgets to determine
managers areas of responsibility
and to measure managers'
performance in those areas
 ✓ Budgets are also used manage for making annual operating
and account for cash. Such plans and preparing budgets.
budgets establish targeted levels ✓ Long-term goals cannot be
of cash receipts and limits on the vague; they must set specific
spending of cash for particular tactical targets and timetables
purposes. and assign operating
responsibility for achieving the
goals to specific personnel.
Budgeting is advantageous for ✓ For example, a long-term goal for
organizations, because; a company that currently holds
only 4 percent of its product's
1. Budgets foster organizational market share might specify that
communication. the vice president of marketing is
2. Budgets ensure a focus both on to develop strategies to ensure
future events and on resolving day- that the company controls 10
to-day issues. percent of the market in five
3. Budgets assign resources and the years and 15 percent by the end
responsibility to use them wisely to of ten years.
managers who are held
accountable for their results.
4. Budgets can identify potential ✓ Annual operating plans involve
constraints before they become every part of an enterprise and
problems. are much more detailed than
5. Budgets facilitate congruence long-term strategic plans. To
between organizational and formulate an annual operating
personal goals. plan, an organization must
6. Budgets define organizational restate its long-term goals in
goals and objectives numerically, terms of what it needs to during
against which actual performance the next year.
results can be evaluated. ✓ The process entails making
decisions about sales and profit
targets, human resource needs,
and the introduction of new
products or services.
✓ Strategic planning is the process
✓ The short-term goals identified in
by which management
an annual operating plan are the
establishes an organization's
basis of an organization's
long-term goals. These goals
operating budgets for the year.
define the strategic direction that
an organization will take over a
ten-year period and are the basis
 how detailed the information
needs are.
❖ Every budget and budget line
item is associated with a specific
role or job in an organization.
❖ For example, a department ❖ Traditional budgeting approaches
manager is responsible for the require managers to justify only
department's budget, and the budget changes over the past
marketing vice president is year.
responsible for what is spent on ❖ An alternative to traditional
advertising. budgeting is zero-based
❖ Since managers responsibilities budgeting, Zero-based budgeting
and budget authority are linked, requires that every budget item
managers must explain or take be justified annually, not just the
corrective action for any changes. So each year the
deviations between their budgets budget is built from scratch.
and actual results.

❖ Successful budget
❖ Because an organization's main implementation depends on two
activities take place at its lower factors-clear communication and
levels, the information necessary the support of top management
for establishing a budget flows ❖ To ensure their cooperation in
from the employees and implementing the budget, all key
supervisors of those activities persons involved must know what
through middle managers to roles they are expected to play
senior executives. and must have specific directions
❖ Each person in this chain of on how to achieve their
communication thus plays a role performance goals.
in developing al budget, as well
as in implementing it.
A master budget consists of a set
of operating budgets and a set of
❖ Budgets, like the company's fiscal financial budgets that detail an
period, generally cover a one- organization's financial plans for a
year period of time. specific accounting period, generally a
❖ An annual operating budget may year.
be divided further by an When a master budget covers an
organization into monthly or entire year, some of the operating and
quarterly periods depending on
financial budgets may show planned
results by month or by quarter.

As the term implies, operating

budgets are plans used in daily
operations. They are also the
basis for preparing the financial
budgets, which are projections of
financial results for the
accounting period.
Financial budgets include a
budgeted income statement, a
capital expenditures budget, a
cash budget, and a budgeted
balance sheet.

Lesson 06: The Budgeting Process;

Operating Budgets

The Sales Budget

✓ A sales budget is a detailed plan,

*Some organizations choose to include
expressed in both units and peso,
the cost of goods sold budget in the
that identifies the sales expected
budget income statement.
during an accounting period.
 ✓ Sales managers use this that production related activities
information to plan sales- and will require.
marketing-related activities and to ✓ To prepare a production budget,
determine their human, physical, managers must know the
and technical resource needs. budgeted number of unit sales
✓ Accountants use the information (which is specified in the sales
to determine estimated cash budget) and the desired level of
receipts for the cash budget. ending finished goods inventory
for each period in the budget
The following equation is used to year. That level is often stated as
determine the total budgeted sales: a percentage of the next period's
budgeted unit sales.

The following formula identifies the

✓ To help estimate sales volume, production needs for each
managers often use a sales accounting period:
forecast, which is a projection of
sales demand (the estimated
sales in units) based on an
analysis of external and internal
factors. EXAMPLE OF PRODUCTION
EXAMPLE OF SALES BUDGET BUDGET

The Production Budget

✓ A production budget is a detailed The Direct Materials Purchases

plan showing the number of units Budget
that a company must produce to ✓ A direct materials purchases
meet budgeted sales and budget is a detailed plan that
inventory needs. identifies the quantity of
✓ Production managers use this purchases required to meet
information to plan for the budgeted production and
materials and human resources inventory needs and the costs
 associated with those The Direct Labor Budget
purchases.
✓ A purchasing department uses ✓ A direct labor budget is a detailed
this information to plan plan that estimates the direct
purchases of direct materials. labor hours needed during an
Accountants use the same accounting period and the
information to estimate cash associated costs.
payments to suppliers. ✓ Production managers use
✓ To prepare a direct materials estimated direct labor hours to
purchases budget, managers plan how many employees will be
must know what production required during the period and
needs will be in each accounting the hours that each will work, and
period in the budget; this accountants use estimated direct
information is provided by the labor costs to plan for cash
production budget payments to the workers.
✓ They must also know the desired ✓ Managers of human resources
level of the direct materials use the information in a direct
inventory for each period and the labor budget in deciding whether
per unit cost of direct materials. to hire new employees or reduce
The desired level of ending the existing work. force and also
direct materials inventory is as a guide in training employees
usually stated as a percentage and preparing schedules of
of the next period's production employee fringe benefits.
needs The following two steps are used to
EXAMPLE OF DIRECT MATERIAL prepare a direct labor budget:
PURCHASES BUDGET Step 1.

Estimate the total direct labor

hours by multiplying the estimated direct
labor hours per unit by the anticipated
units of production (see Exhibit 7-2).

Step 2.

Calculate the total budgeted

direct labor cost by multiplying the
estimated total direct labor hours by the
estimated direct labor cost per hour. A
company's human resources
department provides an estimate of the
hourly labor wage.
 Exhibit 7-4 shows how
Framecraft Company uses these
formulas to estimate the total direct
labor cost. Framecraft's Production
Department needs an esti mated one
tenth (0.10) of a direct labor hour to
complete one unit. Its Human
Resources Department estimates a
direct labor cost of $6 per hour.

EXAMPLE OF DIRECT LABOR The Selling and Administrative

BUDGET Expense Budget

A selling and administrative

expense budget is a detailed plan
of operating expenses, other than
those related to production, that
are needed to support sales and
overall operations during an
accounting period.
Accountants use this budget to
The Overhead Budget estimate cash payments for
products or services not used in
An overhead budget is a detailed production-related activities.
plan of anticipated manufacturing
costs, other than direct materials
and direct labor costs, that must
be incurred to meet budgeted
production needs.
It has two purposes: to integrate
the overhead cost budgets
developed by the managers of
production and production-related
departments and to group
information for the calculation of
overhead rates for the next
accounting period.
The Cost of Goods Manufactured
Budget

A cost of goods manufactured

budget is a detailed plan that
summarizes the estimated costs of
production during an accounting period.
The sources of information for total
manufacturing costs are the direct
materials, direct labor, and overhead
budgets.
 ~Finals~
Lesson 08: Statement of Cash Flows

The statement of cash flows

reports cash receipts (inflows) and cash
payments (outflows) for a period. Cash
Operating activities include
flows are separated into operating,
transactions and events that affect net
investing, and financing activities. The
income.
details of sources and uses of cash
make this statement useful. Examples are the production and
purchase of inventory, the sale of goods
The statement of cash flows helps
and services to customers, and the
answer the following questions:
expenditures to operate the business.
✓ What explains the change in the From collections
cash balance?
Not all items in income, such as
✓ How does a company receive its
unusual gains and losses, are operating
cash?
activities.
✓ Where does a company spend its
cash? The exhibit below lists common
✓ Why do income and cash flows cash inflows and outflows from
differ? operating activities.

Cash receipts and cash

payments are classified in one of three
categories: operating, investing, or
financing activities.

❖ A net cash inflow (source)

occurs when the receipts in a
category exceed the payments.
Operating Activities – Income
❖ A net cash outflow (use) occurs
statement items
when the payments in a category
exceed the receipts.

➢ From sale of goods or services.

➢ From interest received and
dividends received.
 ➢ From sale of investments in debt
or equity of securities of other
➢ To suppliers for inventory. entities.
➢ To employees for wages. ➢ From collection of principal on
➢ To government for taxes. loans to other entities.
➢ To lenders for interest.
➢ To others for expenses.

➢ To purchase property, plant, and

equipment.
➢ To purchase investments in debt
or equity securities of other
entities.
➢ To make loans to other entities

Financing Activities

Investing Activities include

transactions and events that come from
the purchase and sale of long-term
assets.

Point: For simplicity, we will assume

Financing activities include
purchases and sales of equity and debt
transactions and events that affect long-
securities are investing activities.
term liabilities and equity.
The exhibit below lists examples
Examples are (1) getting cash
of cash flows from investing activities.
from issuing debt and repaying debt and
(2) receiving cash from or distributing
cash to owners.

Borrowing and repaying principal

on both short and long-term debt are
financing activities.

The exhibit below lists examples

Investing Activities – Changes in of cash flows from financing activities.
investments and long-term assets

➢ From sale of property, plant, and

equipment.
Financing activities – Changes in
long-term liabilities and stockholders'
equity Not all of a company’s significant
activities involve cash. Examples of
significant non-cash activities are as
follows.
➢ From sale of common stock.
➢ From issuance of debt (bonds ✓ Direct issuance of common
and notes). stock to purchase assets.

Cash outflows:

➢ To stockholders as dividends.
✓ Conversion of bonds into
➢ To redeem long-term debt or
common stock.
reacquire capital stock (treasury
stock).

✓ Direct issuance of debt to

purchase assets.
❖ Operating, investing, and
financing activities are loosely
linked to different parts of the
balance sheet. ✓ Exchange of plant assets.
❖ Operating activities are affected
by changes in current assets and
current liabilities (and the income
statement).
❖ Investing activities are affected ❖ Companies do not report in the body
by changes in long-term assets. of the statement of cash flows
❖ Financing activities are affected significant financing and investing
by changes in long-term liabilities activities that do not affect cash.
and equity.
❖ Instead, they report these activities
in either a separate schedule at the
bottom of the statement of cash
flows or in a separate note or
supplementary schedule to the
financial statements.

❖ The reporting of these non-cash

activities in a separate schedule
 satisfies the full disclosure
principle.

Preparing a statement of cash

flows has five steps. Computing the net
increase or net decrease in cash is a
simple but crucial computation.

It equals the current period's cash

balance minus the prior period's cash
balance. This is the bottom-line figure
for the statement of cash flows and is a
check on accuracy.

STEP 1: Adjustments for Income

Statement Items Not Affecting Cash

Some expenses and losses

subtracted from net income were not
cash outflows. Examples are
depreciation, amortization, depletion,
bad debts expense, loss from an asset
sale, and loss from retirement of notes
payable. The indirect method requires
that Expenses and losses with no
cash outflows are added back to net Activities, or as Non-cash Investing and
income. Financing Activities

These expenses and losses did

not reduce cash, and adding them back
cancels their deductions from net
income.

When net income has revenues

and gains that are not cash inflows, the
indirect method requires that Revenues
and gains with no cash inflows are
subtracted from net income.

STEP 2: Adjustments for Changes in

Current Assets and Current
Liabilities

STEP 3: Calculate the net cash flows

from operating activities

Analyze Changes in Non-current

Asset and Liability Accounts and
Stockholders' Equity Accounts and
Record as Investing and Financing