Strategic-Cost-Management-Group-2-Copy.pptx

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1. CHAPTER 4 Managerial Accounting

2. THE CONCEPT AND FUNCTIONS OF MANAGEMENT Management, according to Webster is “a judicious use of means to accomplish an end”. Others define management as process of accomplishing work through and with people . Whichever definition is used, it may be noted that managements involves achieving something an end, or a goal, by wisely using strategies . To attain the goals set for the firm, the managers should carry out their functions effectively and efficiently . There are two basic management functions; Planning. It involves setting of both immediate and long range goals for the organization and predicting future conditions that are expected to prevail. Controlling. In performing this function, the manager sees to it that operations are carried out in the best possible way, i.e., everything is done in accordance with the plans made to ensure the attainment of business objectives.

3. Management‘s Need for Accounting Information Information needed by management to carry out its decision making function may be either quantitative or non quantitative. Role of Accounting in Management Planning and Control The planning process involves setting of objectives, forecasting the future, and making choices among alternative courses of action with the objective of improving future operations toward the attainment of the organization's goals. Management Accounting Accounting can be divided into financial accounting and managerial accounting. This division is made primarily on the grounds of the orientation of the reports. Financial Accounting refers to reports that are primarily prepared for external users, such as investors, creditors and government regulatory and taxing agencies. It should not be construed at this point that managers have no use for external reports.

4. Managerial Accounting (or management accounting) on the other hand, refers to reports designed to meet the needs of internal users, particularly the managers Managerial Accounting aims to fill the information needs of managers with respect to specific problems, Decisions or situations, to enable them to make informed judgments and sound decisions to achieve the goals of the organization . The Cost Accounting Data Based Classification of financial accounting and managerial accounting, it is important at this point to identify cost accounting activities. However, unlike financial and managerial accounting, cost accounting does not refer to the reporting process. Instead, it refers to the process of determining the cost of some particular product or activity. Cost Accounting data are used for both internal and external accounting reports. Production costs of specific products, or detailed cost information in performing specific activities are usually shown in aggregate, like cost of sales, selling cost, etc.

5. Differences Between Management and Financial Accounting Users of Reports Unifying Concept Accounting Principles Optional Use of Nonmonetary Information Use of Projected Data Emphasis on Precision Amount of Detail Source of Data Purpose Focus on segments

6. Similarities Between Management and Financial Accounting Most elements of financial accounting are also found in management accounting. This is due to the following reasons: The same considerations that make generally accepted accounting principles sensible for the purposes of financial accounting are applied for purposes of management accounting. For instance, management cannot base its reporting system on unverifiable, subjective data, which is the same reason that financial accounting adheres to some concepts and principles like objectivity and cost concept. b. Both financial and managerial accounting draw information from the same operating accounting system..

7. CONTROLLERSHIP Controllership may be defined as the function of business management which combines the responsibility for accounting, reporting, measurement, auditing, taxes, operating controls and other related areas FUNCTIONS OF THE CONTOLLER Planning for control Reporting and interpreting Evaluating and consulting Tax administration Government reporting Protection of assets Economic appraisal

8. Controllership Planning and Control Reporting and Interpreting Evaluation and Consulting Tax administration Government Reporting Protection of Asset Economic Appraisal Treasurership Provisions of Capital Investor Relations Short-term Financing Banking & Custody Credit & Collection Investments Insurance Distinction Between Controller & Treasurer

9. CHAPTER 5 Cost-Volume-Profit and Break-even Analysis

10. COMPUTATION OF PROFIT For the accountant, profit is the excess of revenue over the total costs and expenses incurred in generating such revenue during an accounting period. This can be expressed in the following mathematical equation: Conventional Income Statement Format Profit = Sales - Total Costs and Expenses

11. For example, a company was able to produce and sell 10,000 units of a product during a certain period. This product was sold for P1.50 per unit. Production costs of P7,000 were incurred for the 10,000 units, while selling and administrative expenses amounted to P5,000. Using the above income statement format, profit may be calculated as follows : Sales (10,000 x P1.50) Cost of Goods Sold Gross Profit Selling and Administrative Expenses Profit P 15,000 7,000 8,000 5,000 P 3,000

12. COST-VOLUME-PROFIT ANALYSIS One of the analytical tools that managers can use in profit planning is cost-volume-profit analysis, which is a systematic examination of the relationships among costs, activity levels or volume, and profit. Cost Concept and Classifications It refers to the amount of resources given up in exchange for some goods or services. We can classify cost as; Functional Classification Behavioral Classification Cost Behavior This refers to the way cost changes with respect to a change in the activity level. Cost behavior patterns can be classified as; Fixed Costs Variable Costs Mixed Costs Semi-variable Costs Semi-fixed Costs

13. Fixed Costs Fixed costs are costs that do not change with changing levels of activity. In other words, they remain constant regardless of the change in activity level. Variable Costs Variable costs are costs that change directly and proportionately with the level of activity. In this case, the total variable cost increases as the activity level increases, and the total variable cost decreases as the activity level decreases but the variable cost per activity level remains constant. Mixed Costs Some costs cannot be described by a single cost behavior pattern. These are called mixed costs, which possess both fixed and variable components . Semi-variable Costs In some cases, we encounter cost items which vary directly with the change in activity level. However, unlike in purely variable costs, the rate of change in these cost items with the change in activity level is not constant .

14. COST BEHAVIOR ASSUMPTIONS Two important assumptions are considered in the discussion of cost behavior patterns; the relevant range assumption and the time assumption. 1. The 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 different cost behavior patterns . 2. The Time Assumption The 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. Some costs classified as fixed may no longer be fixed in the long run. Semi-fixed Costs Semi fixed costs are often called step function costs or step costs. They possess some characteristics of both variable and fixed costs. Like variable costs, semi fixed costs increase with the activity level, although not proportionately, and like fixed costs, they remain constant for stretches of activity levels, although not for all levels of activity.

15. High-Low Method A simple and widely used technique of segregating mixed costs components is the high-low method. This technique can be best explained through an illustrative example. Consider, for instance, the following monthly cost data for a period of six months. MONTH COST LABOR HOURS COST PER HOUR January 4,400 1,200 hours 3.65 February 4,700 1,350 hours 3.48 March 4,200 1,100 hours 3.82 April 3,800 900 hours 4.22 May 4,000 1,000 hours 4.00 June 4,800 1 ,400 hours 3.43

16. Break-Even Analysis The focal point in break-even analysis is the computation of break-even sales where total revenues equal total cost (or expenses) is neither profit nor loss. This can be computed using three methods; Equation method or algebraic approach Contribution margin method or formula approach Graphic approach EXAMPLE: Fermay Company produces and sells rubber balls. The variable costs to produce and sell one unit of rubber ball amount to P4.00, while the total fixed manufacturing, selling and administrative costs per period are P12,000. The rubber balls are sold at P10.00 per unit. Determine the break-even sales in units and in pesos.

17. EQUATION METHOD OR ALGEBRAIC APPROACH CONTRIBUTION MARGIN METHOD OR FORMULA APPROACH Sales = Variable Cost + Fixed Cost + Profit x = number of units to be sold to break-even Contribution Margin = Selling Price – Variable Cost Contribution Margin Ratio = Contribution Margin Sales Break-even Sales in Peso = Fixed Cost Contribution Margin Ratio

18. PROFIT PLANNING & BREAK-EVEN SALES FORMULAS Sales in Units = Fixed Cost + Profit Contribution Margin Per Unit Sales in Pesos = Fixed Cost + Profit Contribution Margin Ratio Sales with desired profit can be determined using the following formulas: Example : Assume that Fermay Company wants to know the required sales volume in units and in pesos to earn a desired profit of P6,000.

19. Advantages of Using the Graphical Approach Though the algebraic and formula approaches are not difficult to apply, most analysts resort to the graphical approach in making break-even and cost volume profit analysis because of these advantagest a. It is easier for most managers to understand and visualize financial information presented graphically than those presented in computational or schedular formats. b. With the use of charts, a wider range of activity can be presented with much more information without necessarily experiencing information overload. c. Complex analyses or cases are made easier or simpler to solve and understand with the use of graphs.

20. THE MARGIN OF SAFETY The margin of safety indicates the amount by which actual or planned sales may be reduced without incurring a loss. The formulas involved are; Margin of Safety = Actual or Planned Sales – Break-Even Sales Margin of Safety Ratio = Margin of Safety Actual or Planned Sales To illustrate , assume that Fermay Company has budgeted sales of 5,000 units or P50,000 for the next period. Considering that the company's break-even sales is 2,000 units or P20,000, the margin of safety figures can be calculated as follows: Interpretation: Sales can go down to at least 2,000 units or P20,000 without incurring a loss

21. Multiple Product Break-Even Analysis When a company manufactures and/or sells more than one additional product, determination of the break even point may required additional computations and involve some assumptions. PRODUCTS B E L Selling Price Per Unit P 20 P 30 P 25 Variable Cost Per Unit 16 21 15 Contribution Margin Per unit P 4 P 9 P 10 Contribution Margin Ratio 20% 30% 40% Sales Mix Ratio 3 2 1 Total Fixed Cost 40,000

22. Alternative 1 Composite Contribution Margin = Contribution Margin per unit x Sales Mix R atio No. of Sales = Total Fixed Cost Composite Contribution Margin No. of sales x Sales Mix Ratio = Break-even point in units x selling price = Break-even point in pesos When each product has its own sales price, variabe cost and contribution margin. Also fixed cost cannot be identified with specific products. How can break-even point in units and in pesos be determined?

23. Factors Affecting Profit Change in any of these factors will cause a change in profit . Selling price per unit Variable cost per unit Volume or number of units Fixed Cost Sales Mix