CPAR

CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
MAS 9701
MANAGEMENT ADVISORY SERVICES

BASIC CONCEPTS IN MANAGEMENT ACCOUNTING;

COSTS AND COST CONCEPTS

MANAGEMENT ACCOUNTING
MANAGEMENT ACCOUNTING – the process of identifying, measuring, accumulating, analyzing,
preparing, interpreting, and communicating information that helps managers fulfill
organizational objectives.

MANAGEMENT ACCOUNTANT - a person who provides financial data and advice to a company for
use in the organization and development of its business.

FUNCTIONS/OBJECTIVES OF MANAGEMENT ACCOUNTING:

The basic function of management accounting is to assist management in performing its functions
effectively. The functions of management are planning, organizing, and controlling. It also
provides information that may be used by management for decision-making.

MANAGEMENT FUNCTIONS AND THE NEED FOR MANAGEMENT ACCOUNTING INFORMATION

1. PLANNING – involves:
a. setting of immediate, as well as long-range goals for the organization;
b. predicting future conditions that are expected to prevail;
c. considering the different means or strategies by which the goals set may be achieved; and
d. deciding which of the strategies should be used to attain such goals.

2. DIRECTING AND MOTIVATING – involves overseeing the day-to-day activities, seeing to it that the
organization is functioning smoothly, and the members of the organization are mobilized to carry out plans.

3. CONTROLLING – involves checking the performance of activities against the plan or standards set
and deciding what corrective actions to take should there be any deviation between the actual and
planned/standard performance.
➢ All the aforementioned management functions involve decision-making. In performing the
decision-making function, managers need information. Such information is provided by management
accountants.

MANAGEMENT ADVISORY SERVICES – (also called management consulting services, business advisory
services, management services) - refers to that area of accounting work concerned with providing advice
and technical assistance to help clients improve the use of their resources to achieve their goals.

CHARACTERISTICS OF MAS
1. Services are rendered for the management rather than for third parties.
2. Involves problem solving.
3. Relates to the future.
4. Broad in scope.
5. Involves varied assignments.
6. Engagements are usually non-recurring.
7. Engagements require highly qualified staff.
8. Human relations play a vital role in each engagement.
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MANAGEMENT ACCOUNTING vs. FINANCIAL ACCOUNTING

MANAGEMENT
FINANCIAL ACCOUNTING
ACCOUNTING
Internal users: officers External users: stockholders,
USERS OF and managers creditors, concerned government
REPORT
agencies

To provide internal users To provide external users with

with information that may information about the
be used by managers in organization’s financial position
PURPOSE carrying out the functions and results of operations.
of planning, controlling,
decision-making, and
performance evaluation.
Different types of reports, Primarily financial statements and
such as budgets, financial the accompanying notes to such
TYPES OF projections, cost analyses, statements.
REPORTS etc., depending on the
specific needs of
management.
Reports are based on a Reports are based almost
BASIS OF combination of historical, exclusively on historical data.
REPORTS estimated, and projected
data.
In preparing reports, the Reports are prepared in
management of a accordance with generally
STANDARDS OF company can set rules to accepted accounting principles
PRESENTATION produce information most and other pronouncements of
relevant to its specific authoritative accounting bodies.
needs.
Focus of reports is on the Financial reports relate to the
company’s value chain, business as a whole.
REPORTING
ENTITY such as a business
segment, product- line,
supplier, or customer.
Reports may cover any Reports usually cover a year,
time period – year, quarter, or month.
PERIOD quarter, month, week,
COVERED day, etc. Reports may be
required as frequently as
needed.
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MANAGEMENT ACCOUNTING vs. COST ACCOUNTING

COST ACCOUNTING MANAGEMENT ACCOUNTING

Revolves around cot Helps management make
INHERENT computation, cost control effective decisions about the
MEANING
and cost reduction business

Prevents the business Offers a big picture of how

APPLICATION from incurring costs management should strategize
beyond the budget

MEASURING Quantitative Quantitative and qualitative

GRID

One of the many subsets Vast in itself

SUBSET of management
accounting
BASIS OF Historic information Historic and predictive
DECISION
information
MAKING

Statutory audit is required Audit has no statutory

STATUTORY for big businesses requirement
REQUIREMENT

Not dependent on Dependent on both cost

management accounting accounting and financial
DEPENDENCE
to be successfully accounting for successful
implemented implementation
Management, Management only
USERS
shareholders, and vendors

CONTROLLER: The Chief Management Accountant

CONTROLLER – the chief management accounting executive of an organization who is mainly
responsible for the accounting aspects of management planning and control

FUNCTIONS OF THE CONTROLLER

1. PLANNING FOR CONTROL – to establish, coordinate, and administer, as an integral part of

management, an adequate plan for the control of operations.
2. REPORTING AND INTERPRETING – to compare performance with operating plans and standards
and to report and interpret results of operations to the concerned users of such reports.
3. EVALUATING AND CONSULTING – to consult with all levels of management responsible for policy
or action concerning any phase of the operation of the business as it relates to the attainment
of objectives and effectiveness of policies, organizational structures, and procedures.
4. TAX ADMINISTRATION – to establish and administer tax policies and procedures.
5. GOVERNMENT REPORTING – to supervise or coordinate the preparation of reports to government
agencies.
6. PROTECTION OF ASSETS – to assure protection for the assets of business through internal control,
internal auditing, and assuring proper insurance coverage.
7. ECONOMIC APPRAISAL – to continuously appraise economic and social forces and government
influences and to interpret their effect upon the business.
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DISTINCTIONS BETWEEN CONTROLLERSHIP AND TREASURERSHIP

CONTROLLERSHIP TREASURERSHIP
1. Planning and control 1. Provision of capital
2. Reporting and 2. Investor relations
interpreting 3. Short-term financing
3. Evaluating and 4. Banking and custody
consulting 5. Credit and collections
4. Tax administration 6. Investments
5. Government reporting 7. Insurance
6. Protection of assets
7. Economic appraisal

CERTIFICATION AVAILABLE TO MANAGEMENT ACCOUNTANTS

THE CMA PROGRAM OR CERTIFICATE IN MANAGEMENT ACCOUNTING

The CMA Program or Certificate in Management Accounting is a program for management

accountants designed to recognize their unique qualifications, high standards, and professional
expertise in the field of management accounting.

Qualified management accountants earn the designation Certified Management Accountant

(CMA), the internal accountant’s counterpart to the Certified Public Accountants (CPA).

THE ORGANIZATION INVOLVED

In the United States, the CMA Program is conducted by the Institute of Management Accountants
(IMA), the largest US Professional organization of accountants.

In the Philippines, the Philippine Association of Management Accountants (PAMA) conducts the
Certificate in Management Accounting (CMA) program through its continuing education arm, the
Philippine Institute of Management Accountants (PIMA).
The PAMA is affiliated with the Institute of Management Accountants or IMA .

The PAMA was founded primarily to provide its members with professional and educational activities that
enhance their knowledge of management accounting principles and methods.

OBJECTIVES OF THE PROGRAM

The CMA has four objectives, consistent with the mission of the Philippine Association of
Management Accountants (PAMA) to "promote management accounting, enhance the capability
of its members and foster high standards of professionalism."
• To establish Management Accounting as a recognized profession in the field of business
• To encourage stricter and high quality educational standards in Management Accounting
• To provide objective means for measuring the Management Accountant's knowledge and
competence
• To encourage continued professional growth

COSTS AND COST CONCEPTS

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.
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Classifications of costs

As to Function - manufacturing; selling and administrative

As to elements - materials, labor, factory overhead; all examples of selling and administrative
costs.

Alternative Classifications:

Business Function – Research and Development, Design of Products and Processes,

Production, Marketing, Distribution, Customer Service.

Assignment to Cost Object – Direct Cost, Indirect Cost.

Behavior Pattern in Relation to Activity or Volume - Variable, Fixed, Mixed Costs.

Aggregate or Average – Total Cost, Unit Cost

Assets or Expense - Inventoriable Cost or Product Cost, Period Cost

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.

COST BEHAVIOR
COST BEHAVIOR – describes how a cost behaves or changes as the amount of cost driver changes.

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.

CORRELATION ANALYSIS
Correlation – measure of the co-variation between the dependent and independent variables
MAS 9701 COST CONCEPTS AND ANALYSIS Page 6 of 10

Coefficient of Correlation (denoted by r) – measure of the extent of the linear relationship between
two variables

Coefficient of Determination (denoted by r2) is computed by squaring the value of r. It represents

the percentage of the total variation in the dependent variable y that is explained or accounted
for by the regression equation.

A very high r2 means that the values in the regression equation explain virtually the entire amount
of the total cost. The variables are highly correlated, i.e., the cost driver selected is highly related
to the dependent cost.

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:

Equation 1: ∑y = na + b∑x

Equation 2: ∑xy = a∑x + b∑x2

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.
“a” is an estimate of the fixed cost
“b” is an estimate of the variable cost per unit of activity.

VALUE CHAIN

Research Design
and of Products Production Marketing Distribution Customer
Development and Processes Service

EXERCISES:
1. Consider the descriptors that follow. Determine whether the descriptors are most closely
associated with financial accounting or managerial accounting.

1. The users of information are the managers within the organization.

2. Reports focus on the enterprise in its entirety. Based almost exclusively on historical
transaction data.
3. Not required and unregulated, since it is intended only for management.
4. Reports often focus on subunits within the organization, such as departments, divisions,
geographical regions, or product lines. Based on a combination of historical data,
estimates, and projections of future events.
MAS 9701 COST CONCEPTS AND ANALYSIS Page 7 of 10

5. The primary source of data is almost exclusively the organization's basic accounting
system, which accumulates financial information.
6. Required and must conform to generally accepted accounting principles.
7. Users of information are interested parties outside the organization.
8. Sources of data are the organization’s basic accounting system, plus various other
sources, such as rates of defective products manufactured, physical quantities of
materials and labor used in production, occupancy rates in hotels and hospitals, and
average take-off delays in airlines.
9. Focuses on planning, decision making, directing, and control.
10. May become involved with measures of customer satisfaction, and the amount of actual
cost incurred vs. budgeted targets.

2. Roles Of Controller and Treasurer Classify the following as pertaining either to a controller
or a treasurer:

1. Supervises the accounting department

2. Manages investments.
3. Manages relationships with creditors, investors, and government agencies that provide
financial support.
4. Assists line managers throughout the organization in interpreting and using managerial
accounting information.
5. Responsible for credit policy and collection of accounts.
6. Prepares all reports for external parties (financial accounting).
7. Manages the organization’s insurance coverage.
8. Prepares all reports and information for internal users (managerial accounting).
9. Maintains custody of cash and other assets.
10. Prepares reports required for taxation and governmental reporting: advises
management on tax-related issues. C

3. CURRENT FOCUS OF MANAGEMENT ACCOUNTING

Match the following items:
1. Continuous reduction in cost
2. Linked set of value-creating activities
3. Using cost data to identify superior strategies
4. Selling over the Internet
5. A product’s total tangible and intangible benefits
6. Suppliers and customers
7. Flow of materials from upstream to downstream
8. Internal value chain
9. Zero defects
10. Realization of less sacrifice
11. Activity-based costing and process value analysis

a. Strategic cost management

b. Total quality management
c. Internal linkages
d. Activity-based management
e. Customer value
f. E-business
g. Industrial value chain
h. External linkages
i. Total product
j. Supply chain management
k. Efficiency

4. A company produces one of the best meat products in Manila. The company's controller
compiled the following information by analyzing the accounting records:

1. Meat costs the company ₱400 per kilo of sausage produced.

2. Compensation for production employees is ₱280 per kilo of product produced.
MAS 9701 COST CONCEPTS AND ANALYSIS Page 8 of 10

3. Supervisory salaries total ₱200,000 per month.

4. The company incurs utility costs of ₱20,000 per month plus ₱80 per kilo of product
produced.
5. Insurance and property taxes average ₱30,000 per month.

Required:
A. Classify each cost as variable, fixed, or semi variable.
B. Write a formula to express the behavior of the firm's production costs.
(Use the form Y = a + bx, where x denotes the quantity of product produced.)

5. Keyk Haus is a small one-person company that provides elaborate and imaginative wedding
cakes to order for wedding receptions. The owner of the company would like to understand the
cost structure of the company and has compiled the following records of activity and costs
incurred. The owner believes that the number of weddings catered is the best measure of
activity.
Month Weddings Costs Incurred
January 6 ₱2,000
February 2 1,800
March 3 1,900
April 9 2,150
May 16 2,650
June 50 11,000
July 20 2,610

REQUIRED:
a. Using the high-low method, estimate the variable cost per wedding and the total fixed cost
per month. (Round off the variable cost per wedding to the nearest centavo and the total fixed
cost to the nearest peso.)
b. Using the least-squares regression method, estimate the variable cost per wedding and the
total fixed cost per month. (Round off the variable cost per wedding to the nearest centavo
and the total fixed cost to the nearest peso.)

6. The following selected data were taken from the accounting records of a company:

Months Machine Hours Manufacturing Overhead

May 46,000 ₱ 889,000
June 60,000 1,130,000
July 68,000 1,274,000
August 52,000 980,000
July's costs consisted of machine supplies (₱170,000), property taxes (₱24,000), and plant
maintenance (₱1,080,000). These costs exhibit the following respective behavior: variable, fixed,
and semivariable.

Required:
a. Determine the machine supplies and property taxes for May.
b. By using the high-low method, analyze the company's plant maintenance cost and
calculate the monthly fixed portion and the variable cost per machine hour.
c. Assume that present cost behavior patterns continue into future months. Estimate the total
amount of manufacturing overhead the company can expect in September if 56,000
machine hours are worked.

7. The method of least squares was used to develop a cost equation to predict the cost of
maintenance. Data for the past 10 months were used for the regression.

The following computer output was received:

Intercept = ₱100,000
Slope = 12
r2 = 84.64%
MAS 9701 COST CONCEPTS AND ANALYSIS Page 9 of 10

The driver used was “number of maintenance hours.” The relevant range is from 500 to 3,000
maintenance hours.

Required:
1. What percentage of the variability in maintenance cost is explained by number of
maintenance hours? Do you think the equation will predict well? Why or why not?
2. What is the coefficient of correlation?
3. What is the cost formula?
4. Using the cost formula, predict the cost of maintenance if 4,000 maintenance
hours are to be worked next year.
5. Using the cost formula, predict the cost of maintenance if 2,500 maintenance
hours are to be worked next year.

8. A company is making plans for the introduction of a new product. The following estimates
of manufacturing costs have been derived for 100,000 units, to be produced during the
first year:

Direct material: ₱200,000

Direct labor: ₱500,000 (at ₱50 per hour)

Overhead costs have not yet been estimated, but monthly data on total production and
overhead for the past 12 months have been analyzed by using least-squares regression.
The major overhead cost driver is direct labor hours, with the following results:

Computed values:
Fixed overhead cost: ₱300,000
Coefficient of independent variable: ₱3

Required:
1. Prepare the company's regression equation (Y = a + bx) to estimate overhead.

2. Calculate the predicted total manufacturing cost at an activity level of 80,000 units.

3. What is the company's dependent variable in this case?

4. How can the company evaluate the "quality" of its regression equation?

9. For the past five years, a company has had a policy of producing to meet customer demand.
As a result, finished goods inventory is minimal, and, for the most part, units produced
equal units sold.

Recently, the company’s industry entered a recession, and it is producing well below
capacity (and expects to continue doing so for the coming year). The president is willing to
accept orders that at least cover their variable costs so that the company can keep its
employees and avoid layoffs. Also, any orders above variable costs will increase overall
profitability of the company. Toward that end, the president of the company implemented
a policy that any special orders will be accepted if they cover the costs that the orders cause.

To help implement the policy, the company’s controller developed the following cost
formulas:

Direct material usage = ₱10x, r = 0.94

Direct labor usage = ₱20x, r = 0.95
Overhead = ₱50,000 + ₱12x, r = 0.72
Selling costs = ₱20,000 + ₱8x, r = 0.92

where x = direct labor hours

MAS 9701 COST CONCEPTS AND ANALYSIS Page 10 of 10

Required:
1. Compute the total unit variable cost. Suppose that the company received an order for
2,000 units at ₱60 per unit. Each unit uses one direct labor hour for production. Should
it accept the order? (The order would not displace any of the company’s regular
orders.)
2. Explain the significance of the coefficient of correlation measures for the cost formulas.
Did these measures have a bearing on your answer in Requirement 1? Should they
have a bearing? Why?
3. Suppose that a multiple regression equation is developed for overhead costs:
Y = ₱20,000 + ₱20a + ₱400b + ₱100c,

where a = direct labor hours,

b = number of setups, and
c = engineering hours.

The correlation coefficient for the equation is 0.94. Assume that the order of 2,000
units requires 10 setups and 200 engineering hours. Given this new information,
should the company accept the special order referred to in Requirement 1? Is there
any other information about cost behavior that you would like to have? Explain.

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