OBJECTIVES, ROLE AND SCOPE OF MANAGEMENT ACCOUNTING
Strategic Cost Management
/RCROQUE
BASIC MANAGEMENT FUNCTIONS AND CONCEPTS
MANAGEMENT ACCOUNTING FUNCTIOprovide advice based on information that is provided.
The information provided by management accounting covers all areas of strategy and operations, and
includes information to assist with planning, control, and other decision-making by
management.
The role of the management accountant today is more concerned with providing complex analysis
and information to support business management than with providing routine reports, since much
routine work is now computeritechnology have also made it easier to provide accounting information to non-
financial managers. At the same time, the areas covered by management accounting have extended
and broadened to include strategic information and non-financial information, and information to
support risk management. Developments in technology have also made it easier to provide
accounting information to non-financial managers.
MANAGEMENT ACCOUNTING ROLE IN CROSS-FUNCTIONAL TEAMS
accountants provide information to other managers, it has become common to include management
accountants within cross-functional teams, or to assign them to work with non-accounting functions.
OBJECTIVES, ROLE AND SCOPE OF MANAGEMENT ACCOUNTING
Strategic Cost Management
/RCROQUE
BASIC MANAGEMENT FUNCTIONS AND CONCEPTS
MANAGEMENT ACCOUNTING FUNCTION
➢ The management accounting function exists to provide information to decision-makers, and to
provide advice based on information that is provided.
➢ The information provided by management accounting covers all areas of strategy and operations, and
includes information to assist with planning, control, and other decision-making by
management.
➢ The role of the management accountant today is more concerned with providing complex analysis
and information to support business management than with providing routine reports, since much
routine work is now computerized.
➢ Developments in technology have also made it easier to provide accounting information to non-
financial managers. At the same time, the areas covered by management accounting have extended
and broadened to include strategic information and non-financial information, and information to
support risk management. Developments in technology have also made it easier to provide
accounting information to non-financial managers.
MANAGEMENT ACCOUNTING ROLE IN CROSS-FUNCTIONAL TEAMS
➢ In some organizations, the cost and management accounting function may be organized as a
functional section or department within the organization. However, because management
accountants provide information to other managers, it has become common to include management
accountants within cross-functional teams, or to assign them to work with non-accounting functions.
➢ A cross-functional team is a small group of individuals, with different expertise, taken from many
different parts and levels of an organization, which comes together to work towards a common
purpose or goal. The size of cross-functional team will vary according to the scale and complexity of
the project.
➢ Benefits of cross-functional teams include: (1) improved coordination and integration of systems or
activities, (2) problem-solving across traditional functional or organizational boundaries, (3) facilitate
innovation and product/service development.
MANAGEMENT OBJECTIVES OF THE ACCOUNTING FUNCTION
➢ The objectives of the management accounting function within an organization should depend on the
information needs of the ‘internal customers’ – the managers who need information to help them to
run the business. The overall objective should be the provision of a quality service, but this broad
objective can be analyzed into a number of sub-objectives.
ROLE AND ACTIVITIES OF CONTROLLER AND TREASURER
CONTROLLER
➢ A financial officer responsible for accounting and control and deals with records, systems, and
processes to attain the objectives of internal controls and good managing.
➢ In essence, a financial controller is the head accountant of the company. He supervises other
accountants and oversees the preparation of financial statements such as the statement of financial
position, statement of comprehensive income, cash flow statements, and statement of shareholders’
equity.
➢ The basic functions of a controller are as enumerated:
1. Planning and controlling
2. Reporting
3. Evaluating and consulting
4. Government relations, compliance, and reporting
5. Economic appraisal
6. Tax planning and administration
TREASURER
➢ He serves as the protector of a company’s value and finances from financial risks that arise from
business activities. Traditionally, he is under the accounting department, but has now branched out
into a new segment which is known as the corporate treasury management.
➢ He deals with money, cash, or wealth of an organization. He knows the sources of money and
exercises prudence in using the money of an organization.
➢ The basic functions of a treasurer are as enumerated:
1. Cash flow management:
a. Operating – credit and collection
b. Investing – investments
c. Financing – capital provision, investor relations, short-term financing, banking and custody
2. Risk management – insurance
INTERNATIONAL CERTIFICATIONS IN MANAGEMENT ACCOUNTING
INTERNATIONAL CERTIFICATIONS IN MANAGEMENT ACCOUNTING
➢ Certified Public Accounting (CPA)
➢ Certified Management Accountant (CMA) *
➢ Certified Financial Manager (CFM) *
* These are not “licenses”, per se, but do represent significant competency in management accounting
and financial management skills. These certifications are sponsored by the Institute of Management
Accountants.
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Management accounting concepts and
techniques for planning & control
Cost terms, concepts and behavior
Cost – a measurement, in monetary terms,
of the amount of resources used for some
purpose. When notified by a term
that defines the purpose, cost becomes
operational, e.g., selling cost, acquisition
cost, variable cost, etc.
Cost Pool – an account in which a variety
of similar costs are accumulated prior to
allocation to cost objects. It is a
group of costs associated with an activity.
Example: overhead account.
Cost object – the intermediate and final
disposition of cost pools. Example:
product, job, process
Cost driver – a factor that causes a change
in the cost pool for a particular activity. It
is used as a basis for cost
allocation; any factor or activity that has a
direct cause-effect relationship
Activity – any event, action, transaction, or
work sequence that incurs costs when
producing a product or providing a
service.
Nature and classification of costs
1. Natural - costs are disclosed according
to their nature such as depreciation,
transports costs, rent expense, wages
and salaries etc.
2. Functional – costs are classified per
function such as manufacturing, selling,
and administrative costs.
3. Behavioral – costs are classified by
how they react to change in activity (i.e.
fixed, variable, mixed).
Analysis of cost behavior
TYPES OF COSTS AS TO BEHAVIOR:
1. FIXED COST – in total: constant within
the relevant range as activity output
changes; per unit: changes as activity
level changes
2. VARIABLE COST – in total: varies in
direct proportion to changes in activity
output; per unit: remains constant
3. MIXED COST – has both fixed and
variable components.
COST BEHAVIOR ASSUMPTIONS:
1. Relevant Range Assumption
Relevant range refers to the band of
activity within which the identified cost
behavior patterns are valid. Any level of
activity outside this range may have a
different cost behavior pattern.
2. Time Period Assumption
The cost behavior patterns identified are
true only over a specified period of time.
Beyond this, the cost may show a
different behavior.
Splitting mixed cost / Cost prediction
techniques
SEGREGATION OF FIXED AND
VARIABLE ELEMENTS OF MIXED
COSTS:
1. High-Low Points Method – the fixed
and variable elements of the mixed costs
are computed from two data points
(periods)—the high and low periods as to
activity level or cost driver.
2. Statistical Scattergraph Method –
various costs (the dependent variable) are
plotted on a vertical line (y-axis) and
measurement figures (cost drivers or
activity levels) are plotted on a horizontal
line (x-axis). A straight line is drawn
through the points and, using this line, the
rate of variability and the fixed cost are
computed.
3. Method of Least Squares (Regression
Analysis) – mathematically determines a
line of best fit or a linear
regression line through a set of plotted
points so that the sum of the squared
deviations of each actual plotted point
from the point directly above or below it
on the regression line is at minimum.
MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES FOR PLANNING &
CONTROL
Cost terms, concepts and behavior
Cost – a measurement, in monetary terms, of the amount of resources used for some purpose. When notified by a term
that defines the purpose, cost becomes operational, e.g., selling cost, acquisition cost, variable cost, etc.
Cost Pool – an account in which a variety of similar costs are accumulated prior to allocation to cost objects. It is a
group of costs associated with an activity. Example: overhead account.
Cost object – the intermediate and final disposition of cost pools. Example: product, job, process
Cost driver – a factor that causes a change in the cost pool for a particular activity. It is used as a basis for cost
allocation; any factor or activity that has a direct cause-effect relationship
Activity – any event, action, transaction, or work sequence that incurs costs when producing a product or providing a
service.
Nature and classification of costs
1. Natural - costs are disclosed according to their nature such as depreciation, transports costs, rent expense, wages
and salaries etc.
2. Functional – costs are classified per function such as manufacturing, selling, and administrative costs.
3. Behavioral – costs are classified by how they react to change in activity (i.e. fixed, variable, mixed).
ANALYSIS OF COST BEHAVIOR
TYPES OF COSTS AS TO BEHAVIOR:
1. FIXED COST – in total: constant within the relevant range as activity output changes; per unit: changes as activity
level changes
2. VARIABLE COST – in total: varies in direct proportion to changes in activity output; per unit: remains constant
3. MIXED COST – has both fixed and variable components.
COST BEHAVIOR ASSUMPTIONS:
1. Relevant Range Assumption
Relevant range refers to the band of activity within which the identified cost behavior patterns are valid. Any level of
activity outside this range may have a different cost behavior pattern.
2. Time Period Assumption
The cost behavior patterns identified are true only over a specified period of time. Beyond this, the cost may show a
different behavior.
SPLITTING MIXED COST / COST PREDICTION TECHNIQUES
SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS:
1. High-Low Points Method – the fixed and variable elements of the mixed costs are computed from two data points
(periods)—the high and low periods as to activity level or cost driver.
2. Statistical Scattergraph Method – various costs (the dependent variable) are plotted on a vertical line (y-axis) and
measurement figures (cost drivers or activity levels) are plotted on a horizontal line (x-axis). A straight line is drawn
through the points and, using this line, the rate of variability and the fixed cost are computed.
3. Method of Least Squares (Regression Analysis) – mathematically determines a line of best fit or a linear
regression line through a set of plotted points so that the sum of the squared deviations of each actual plotted point
from the point directly above or below it on the regression line is at minimum.
This method uses the following equations in computing for the values of unit variable cost and fixed cost:
COST FORMULA: y = a + bx
Where: “y” denotes total cost. It is called
the dependent variable because it is
dependent on the value of another
variable,
the activity level x.
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Cost-volume profit (CVP) analysis
COST-VOLUME-PROFIT ANALYSIS
(CVP analysis) examines the behavior of
total revenues, total costs, and
Operating income as changes occur in the
output level, selling price, variable cost per
unit, or fixed costs of a product.
Uses, assumptions and limitations of CVP
analysis
Uses
1. Planning
2. Control
3. Analysis
Assumptions and limitations of Cost-
Volume-Profit Analysis
1. Changes in the level of revenues and
costs arise only because of changes in the
number of product (or service)
Units produced and sold.
2. Total costs can be separated into a
fixed component that does not vary with
the output level and a component that
Is variable with respect to the output level.
3. When represented graphically, the
behavior of total revenues and total costs
are linear (represented as a straight
Line) in relation to output level within a
relevant range and time period.
4. The selling price, variable cost per
unit, and fixed costs are known and
constant.
5. The analysis either covers a single
product or assumes that the sales mix,
when multiple products are sold, will
Remain constant as the level of total units
sold changes.
6. All revenues and costs can be added
and compared without taking into account
the time value of money.
Factors affecting profit:
1. Sales volume
2. Selling price
3. Variable cost per unit
4. Fixed costs
5. Sales mix
6. Taxes
Breakeven point in unit sales and peso
sales
BREAK-EVEN SALES – that point of
activity level (sales volume) where total
revenues equal total costs, i.e., there is
Neither profit nor loss.
Methods of Computing Break-even Point
1. Equation Method or algebraic
approach
2. Contribution margin method or
formula approach
3. Graphic approach
Required selling price, unit sales and peso
sales to achieve a target profit
**Reviewer’s note: To discuss using a
case
Sensitivity analysis
SENSITIVITY ANALYSIS - a “what if”
technique that examines the impact of
changes on an answer. For
Example, computer spreadsheets are used
to analyze changes in prices, variable
costs, and
Fixed costs on expected profits.
Use of sales mix in multi-product
companies
MULTIPLE-PRODUCT ANALYSIS
When CVP analysis is used for a multiple-
product firm, the product is defined as a
packageof products. For example,
If the sales mix is 3:1 for Products A and
B, the package would consist of 3 units of
Product A and 1 unit of Product B.
Break-even in packages for a multiple-
product firm is then calculated as:
COST-VOLUME PROFIT (CVP) ANALYSIS
COST-VOLUME-PROFIT ANALYSIS (CVP analysis) examines the behavior of total revenues, total costs, and
operating income as changes occur in the output level, selling price, variable cost per unit, or fixed costs of a
product.
USES, ASSUMPTIONS AND LIMITATIONS OF CVP ANALYSIS
USES
1. Planning
2. Control
3. Analysis
ASSUMPTIONS AND LIMITATIONS OF COST-VOLUME-PROFIT ANALYSIS
1. Changes in the level of revenues and costs arise only because of changes in the number of product (or service)
units produced and sold.
2. Total costs can be separated into a fixed component that does not vary with the output level and a component
that
is variable with respect to the output level.
3. When represented graphically, the behavior of total revenues and total costs are linear (represented as a straight
line) in relation to output level within a relevant range and time period.
4. The selling price, variable cost per unit, and fixed costs are known and constant.
5. The analysis either covers a single product or assumes that the sales mix, when multiple products are sold, will
remain constant as the level of total units sold changes.
6. All revenues and costs can be added and compared without taking into account the time value of money.
FACTORS AFFECTING PROFIT:
1. Sales volume
2. Selling price
3. Variable cost per unit
4. Fixed costs
5. Sales mix
6. Taxes
BREAKEVEN POINT IN UNIT SALES AND PESO SALES
BREAK-EVEN SALES – that point of activity level (sales volume) where total revenues equal total costs, i.e., there is
neither profit nor loss.
METHODS OF COMPUTING BREAK-EVEN POINT
1. Equation Method or algebraic approach
2. Contribution margin method or formula approach
3. Graphic approach
Required selling price, unit sales and peso sales to achieve a target profit
**Reviewer’s note: To discuss using a case
SENSITIVITY ANALYSIS
SENSITIVITY ANALYSIS - a “what if” technique that examines the impact of changes on an answer. For
example, computer spreadsheets are used to analyze changes in prices, variable costs, and
fixed costs on expected profits.
USE OF SALES MIX IN MULTI-PRODUCT COMPANIES
MULTIPLE-PRODUCT ANALYSIS
When CVP analysis is used for a multiple-product firm, the product is defined as a packageof products. For example,
if the sales mix is 3:1 for Products A and B, the package would consist of 3 units of Product A and 1 unit of Product
B.
Break-even in packages for a multiple-product firm is then calculated as:
Break-even packages = Fixed
Costs/Weighted average contribution
margin
SALES MIX - the composition of total
sales in terms of various products, i.e., the
percentage of each
product included in total sales.
Concepts of margin of safety and degree of
operating leverage
MARGIN OF SAFETY – indicates the
amount by which actual or planned sales
may be reduced without incurring a
loss. It is the difference between actual or
planned sales volume and break-even sales.
OPERATING LEVERAGE – a measure of
the extent to which fixed costs are being
used in an organization. The
greater the fixed costs in relation to
variable cost, the greater is the operating
leverage available and the greater is the
sensitivity of income to changes in sales.
DEGREE OF OPERATING LEVERAGE
(DOL) - a measure of the sensitivity of
profit changes to changes in sales
volume. DOL measures the percentage of
change in profit that results from a
percentage of change in sales.
Degree of Operating Leverage (DOL) or
Operating Leverage Factor (OLF) – a
measure, at a given level of sales, of
how a percentage change in sales volume
will affect profits.
Break-even packages = Fixed Costs/Weighted average contribution margin
SALES MIX - the composition of total sales in terms of various products, i.e., the percentage of each
product included in total sales.
CONCEPTS OF MARGIN OF SAFETY AND DEGREE OF OPERATING LEVERAGE
MARGIN OF SAFETY – indicates the amount by which actual or planned sales may be reduced without incurring a
loss. It is the difference between actual or planned sales volume and break-even sales.
OPERATING LEVERAGE – a measure of the extent to which fixed costs are being used in an organization. The
greater the fixed costs in relation to variable cost, the greater is the operating leverage available and the greater is
the
sensitivity of income to changes in sales.
DEGREE OF OPERATING LEVERAGE (DOL) - a measure of the sensitivity of profit changes to changes in sales
volume. DOL measures the percentage of change in profit that results from a percentage of change in sales.
Degree of Operating Leverage (DOL) or Operating Leverage Factor (OLF) – a measure, at a given level of sales, of
how a percentage change in sales volume will affect profits.
> The
higher the degree of operating leverage,
the greater the change in profit when sales
change.
PERCENTAGE CHANGE IN PROFIT =
DOL × Percentage change in sales
Different scenarios using CVP analysis
**Reviewer’s note: To discuss using a
case
> The higher the degree of operating leverage, the greater the change in profit when sales change.
PERCENTAGE CHANGE IN PROFIT = DOL × Percentage change in sales
Different scenarios using CVP analysis
**Reviewer’s note: To discuss using a case
