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Accounting 1B Notes

The document provides an overview of Managerial Accounting, highlighting its focus on internal reporting for decision-making compared to Financial Accounting. It covers key concepts such as cost classifications, budgeting, variance analysis, performance measurement, decentralization, relevant costing, capital budgeting, and financial statement analysis. Each section outlines essential principles and methods used in managerial accounting to aid in planning and controlling business operations.

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7 views

Accounting 1B Notes

The document provides an overview of Managerial Accounting, highlighting its focus on internal reporting for decision-making compared to Financial Accounting. It covers key concepts such as cost classifications, budgeting, variance analysis, performance measurement, decentralization, relevant costing, capital budgeting, and financial statement analysis. Each section outlines essential principles and methods used in managerial accounting to aid in planning and controlling business operations.

Uploaded by

alphatinsky
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Accounting 1B Notes

1. Introduction to Managerial Accounting

Difference between Financial and Managerial Accounting:

Financial Accounting: Focuses on external reporting to shareholders, creditors, and regulators.

Managerial Accounting: Focuses on internal reporting to assist management in decision-making.

Role of Managerial Accounting:

Planning, controlling, and decision-making within an organization.

2. Cost Concepts and Classifications

Types of Costs:

Direct Costs: Directly traceable to a specific cost object (e.g., raw materials, direct labor).

Indirect Costs: Cannot be directly traced to a specific cost object (e.g., overhead, utilities).

Cost Behavior:

Variable Costs: Change in total with changes in activity level (e.g., cost of raw materials).

Fixed Costs: Remain constant in total regardless of activity level (e.g., rent, salaries).

Mixed Costs: Contain both variable and fixed cost elements (e.g., utility bills with a base charge and
additional charges based on usage).

Cost Classifications for Decision Making:

Relevant Costs: Costs that differ between alternatives and impact decisions.

Sunk Costs: Costs that have already been incurred and cannot be changed by any decision.

3. Cost-Volume-Profit (CVP) Analysis

Purpose of CVP Analysis: Understand the relationship between costs, volume, and profit.

Key Components:

Break-even Point: The level of sales at which total revenue equals total costs, resulting in zero profit.

Contribution Margin: The amount remaining from sales revenue after variable costs have been
deducted.

Contribution Margin Ratio: Contribution margin as a percentage of sales revenue.

Formulas:

Break-even point (units) = Fixed Costs / Contribution Margin per unit

Break-even point (sales) = Fixed Costs / Contribution Margin Ratio


4. Budgeting

Purpose of Budgeting: A financial plan that helps businesses plan and control their operations.

Types of Budgets:

Operating Budgets: Include revenue and expense projections for the company's operations.

Capital Budgets: Focus on long-term investments and expenditures.

Cash Budgets: Estimate cash inflows and outflows over a period.

Master Budget: A comprehensive financial plan that includes all of the individual budgets.

5. Standard Costing and Variance Analysis

Standard Costs: Predetermined costs for products or services, used for budgeting and performance
evaluation.

Variance Analysis: The process of comparing actual costs to standard costs and analyzing the differences
(variances).

Types of Variances:

Direct Material Variance: Difference between the actual cost and standard cost of materials.

Direct Labor Variance: Difference between the actual cost and standard cost of labor.

Overhead Variance: Difference between actual overhead costs and standard overhead costs.

6. Performance Measurement and Evaluation

Financial Performance Measures:

Return on Investment (ROI): Measures the profitability of investments.

Residual Income: The net income that an investment earns above the minimum required return.

Non-financial Performance Measures:

Customer satisfaction, employee engagement, process efficiency.

7. Decentralization and Responsibility Accounting

Decentralization: The process of distributing decision-making authority to lower levels in an


organization.

Responsibility Centers:

Cost Centers: Departments that control costs but do not generate revenue.

Revenue Centers: Departments that generate revenue but do not control costs.

Profit Centers: Departments responsible for generating profit by managing both revenue and costs.

Investment Centers: Departments responsible for generating profit and efficiently managing assets.
8. Relevant Costing for Decision Making

Make-or-Buy Decisions: Analyzing whether to produce in-house or purchase from external suppliers.

Special Order Decisions: Deciding whether to accept or reject a special order that is outside the normal
course of business.

Elimination Decisions: Deciding whether to discontinue a product, service, or segment of the business.

9. Capital Budgeting

Purpose of Capital Budgeting: Evaluating long-term investments and deciding which projects to
undertake.

Methods:

Net Present Value (NPV): Calculates the present value of future cash flows minus the initial investment.

Internal Rate of Return (IRR): The discount rate at which the NPV of an investment is zero.

Payback Period: The time required to recover the initial investment from cash flows.

10. Financial Statement Analysis

Purpose of Financial Statement Analysis: Evaluate the financial health and performance of a company.

Techniques:

Ratio Analysis: Analyzing financial ratios to assess liquidity, profitability, and solvency.

Trend Analysis: Examining financial data over time to identify patterns and trends.

Common-Size Analysis: Expressing financial statement items as percentages to compare companies of


different sizes.

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