ACC2002

Managerial Accounting
Semester I, AY 2017/18
 Lecture 1
Managerial Accounting & Business Environment

Relevant Chapters:
• Managerial Accounting (2nd Edition) by Ray H. Garrison, Eric W.
Noreen, Peter C. Brewer, Nam Sang Cheng, and Katherine C. K.
Yuen (Scarborough: McGraw-Hill Education), Chapter 1

Learning Objectives:
• Definition of managerial accounting and explanation of its links to
the value creation processes.
• Understanding ethics, corporate governance, enterprise risk
management, corporate social responsibility and sustainability
which help to define the application of managerial accounting
information and practices.
2
 Comparison of Financial and Managerial
Accounting
Financial Accounting
1. Users External persons who
make financial decisions
Managerial Accounting
Managers who plan for
and control an organization

2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on relevance

versus relevance verifiability for planning and control

4. Precision versus Emphasis on Emphasis on

timeliness precision timeliness

5. Subject Primary focus is on Focuses on segments

the whole organization of an organization
6. GAAP Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory

3
 Managerial Accounting Information

• Focus is on the needs of managers within the

organisation
• Flexibility in types of information provided
• Influenced by managers’ information needs and
differences in production and service technologies
• Used by senior managers through to operational
managers

4
 Work of Management

Planning
Planning
Controlling
Controlling
Decision
Making

5
 Planning

Establish Goals.

Specify How Goals

Will Be Achieved.

Develop Budgets.

6
 Controlling

The control function gathers feedback to

ensure that plans are being followed.

Feedback in the form of performance reports

that compare actual results with the budget
are an essential part of the control function.

7
 Decision Making

Decision making involves

making a selection among
competing alternatives.

What should
we be selling?
Who should
we be serving?
How should
we execute?
8
 Managerial Accounting Processes and
Techniques

A. Contribute to improving the organisation’s competitive

advantage

B. Provide information to help manage resources through

systems of planning and control

C. Support the organisation’s formulation and

implementation of strategy

9
 A Strategic View of Managerial Accounting
• Formulation and implementation of strategy
Objectives (or goals)
Vision  The specific aims of the
 The desired future state or aspiration organisation
of an organisation  Often quantified
 Used by senior managers
 Relates to a specific period of
time
Mission statement Strategies
 Defines the purpose  The long term direction to achieve an
and boundaries of the organisation’s mission and objectives
organisation  Focus on the organisation’s resources to create
value for customers and shareholders

10
A Strategic View of Managerial Accounting

A strategy
is a “game plan”
that enables a company
to attract customers
by distinguishing itself
from competitors.

The focal point of a

company’s strategy should
be its target customers.
11
 Customer Value Propositions
Customer
Understand and respond to
Intimacy
individual customer needs.
Strategy

Operational Deliver products and services

Excellence faster, more conveniently,
Strategy and at lower prices.

Product/Price Offer higher quality

Leadership / Offer value-for-money
Strategy products
12
 Value Creation:
Value-added activities and processes
• Create value to stakeholders
• Need to pay attention to value-added (vs. non-value-
added) activities and processes
– Possible techniques focusing on value-added
activities and processes include:
• Activity-based costing and management
• Just-in-time inventory management and
production
• Target costing

13
 Value Creation:
Different Perspectives
• External Perspectives – Value chain management
– Suppliers (upstream)
– Customers (downstream)
• Internal Perspectives – Value chain management
– Business processes (examples mentioned in the following slide)
• Leadership Perspective
– Leaders who can unite behaviors of fellow employees
• Need to consider intrinsic and extrinsic motivating factors
• Need to be aware of cognitive biases that adversely affect planning,
controlling and decision making.
• Cultural Perspective
– National and organizational cultures
• Power distance, individualism, uncertainty avoidance, masculinity and
long-term orientation
14
 Process Management
A business
process is a series of
steps that are followed in order to
carry out some task in
a business.

Product Customer
R&D Design Manufacturing Marketing Distribution Service

Business functions making up the value chain

15
 Value Creation:
Walmart
• Application to Walmart Case – How does
Walmart becomes the leading supermarket
chain in US?
• How does it create value internally and
externally?
• And how does the leader motivates the staff?

16
 Value Creation:
Walmart – External Perspectives
Externally: “We’re investing to win in retail by providing our customers what
they want, when they want it, at unrivaled prices.”- Doug McMillon, President
and Chief Executive Officer
(source: www.Walmart.com)
Product Price
Wide range of products Cost leadership - Everyday
One-stop easy shopping Low Pricing (EDLP)
Well-trained personnel High sales volumes

Promotion
Place (Distribution)
Advertisements, sales
Intensive distribution
promotions, personal
strategy
selling, social media
17
 Value Creation:
Walmart – Internal Perspectives

• Business Strategy: High volume, low margin strategy

(Everyday Low Pricing)
• Internally:
(1) Logistics: Strong distribution network, advanced
information technology that powered Wal-Mart’s supply chain
and logistics, owned fleet of trucks and Satellite network
system that allowed sharing of information between stores,
distribution centers and suppliers
(2) Purchasing: buy in bulk and just-in-time with the goods
moving from trucks to the supermarkets directly without
going through the distribution centre; Deliberately not to be
dependent on one supplier to avoid being held hostage.

18
 Value Creation:
Walmart – Internal Perspectives

• Internally:
(3) Location: Built large discount stores in small rural
towns (in contrast to its competitors), built stores
within driving distance from distribution center
(1:250-300)
(4) Inventory Management: ensure all suppliers have
electronic linkups with its stores and adapt to the
latest supply chain technologies like RFID which
could increase monitoring and management of
inventory.

19
 Value Creation:
Walmart – Leadership
Motivation & Performance Measurement
• Each store constituted an investment center and
was evaluated on its profits relative to its
inventory investments
• Data analysis from over 5,300 individual stores
collected electronically on a real-time basis reveals
how specific stores were performing. This reduced
the likelihood of stock-outs and to maximized
inventory turnover. Learning points from
“outstanding" stores were used to improve
"problem" stores.
20
 Value Creation:
Walmart – Leadership
Motivation & Performance Measurement
• Pilferage was a significant cost. Walmart addressed this
issue by sharing 50% of the savings from reduction of
store's pilferage, as compared to the industry standard,
with that store's employees through incentive plans.
• “Best Yesterday” ledgers, tracking daily sales
performance against the numbers from one-year prior –
encouraged department managers to be accountable and
gave them an incentive to be creative.
• Other policies and programs for its associates: incentive
bonuses, a discount stock purchase plan, promotion from
within, pay raises based on performance not seniority,
and an open-door policy.

21
 Value Creation:
Walmart

• https://www.youtube.com/watch?v=7iJ2BlxSD
fs

22
 Managerial Accounting:
Beyond the Numbers
In addition to the External, Internal, Leadership and
Cultural Perspectives, the following four business
management perspectives also go beyond the numbers
to enable intelligent planning, control, and decision
making:
• An Ethics Perspective
• A Corporate Governance Perspective
• An Enterprise Risk Management Perspective
• A Corporate Social Responsibility and
Sustainability Perspective
23
 An Ethics Perspective:
IMA Guidelines for Ethical Behavior

The Institute of Management Accountants’ (IMA)

Statement of Ethical Professional Practice
consists of two parts that offer guidelines for:
 Ethical behavior expected of an accountant:
Competence, Confidentiality, Integrity and
Credibility
 Polices and procedures for an ethical conflict
situation facing the accountant.

24
 An Ethics Perspective:
Why Have Ethical Standards?

Ethical standards in business are essential for a

smooth functioning economy.

Without ethical standards in business, the

economy, and all of us who depend on it for
jobs, goods, and services, would suffer.

Abandoning ethical standards in business would

lead to a lower quality of life with less
desirable goods and services at higher prices.
25
 A Corporate Governance Perspective

The system by
which a company is directed
and controlled.
Board of Incentives and
Directors monitoring for

Top To pursue
Management objectives of

Stockholders

26
 A Corporate Governance Perspective:
The Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 was set up to protect the

interests of investors by improving the reliability and accuracy of
corporate financial reports. The key aspects of the legislation
include:
• CEO and CFO to certify in writing that their company’s
financial statements and disclosures fairly represent
the results of operations.
• The Act places restrictions on audit firms, such as prohibiting
public accounting firms from providing a variety of non-audit
services to an audit client to avoid conflict of interests.

27
 A Corporate Governance Perspective:
The Sarbanes-Oxley Act of 2002

The Act establishes severe penalties for certain

behaviors, such as:
• Up to 20 years in prison for altering or destroying
any documents that may eventually be used in an
official proceeding.
• Up to 10 years in prison for retaliating against a
“whistle blower.” [a person who informs on a
person or organization engaged in an illegitimate
activity]

28
An Enterprise Risk Management Perspective

Should I try to avoid the risk, share

the risk, accept the
risk, or reduce the risk?
A process used
by a company to
proactively identify
and manage risk.

Once a company identifies its risks, perhaps the

most common risk management tactic is to reduce
risks by implementing specific controls.
29
An Enterprise Risk Management Perspective

30
 Corporate Social Responsibility &
Sustainability Perspective

Corporate social responsibility (CSR) is a concept

whereby organizations consider the needs
of all stakeholders when making decisions.

Environmental
Customers Employees Suppliers Communities Stockholders & Human Rights
Advocates

CSR extends beyond legal compliance

to include voluntary actions that satisfy
stakeholder expectations.
31
 Corporate Social Responsibility &
Sustainability Perspective
Examples of Corporate Social Responsibility
Companies should provide customers with:
● Safe, high quality products that are fairly
priced
● Competent, courteous, and rapid delivery
of products and services
● Full disclosure of product-related risks
● Easy to use information systems for
shopping and tracking orders
Companies should provide suppliers with:
● Fair contract terms and prompt payments
● Reasonable time to prepare orders
● Hassle-free acceptance of timely and
complete deliveries
● Cooperative rather than unilateral
actions
Companies should provide stockholders with:
● Competent management
● Easy access to complete and accurate
financial information
● Full disclosure of enterprise risks
● Honest answers to knowledgeable
questions
Companies and their suppliers should provide
employees with:
● Safe and humane working conditions
● Non-discriminatory treatments and the
right to organize and file grievances
● Fair compensation
● Opportunities for training, promotion,
and personal development
Companies should provide communities with:
● Payment of fair taxes
● Honest information about plans such as
plant closings
● Resources that support charities, schools,
and civic activities
● Reasonable access to media sources
Companies should provide environmental
and human rights advocates with:
● Greenhouse gas emissions data
● Recycling and resource conservation data
● Child labor transparency
● Full disclosure of suppliers located in
developing countries 32
 Lecture 1
Cost Management Concepts
Relevant Chapters:
• Main reference textbook, Chapter 2
Learning Objectives:
1. Identify the 3 basic manufacturing cost categories.
2. Understand cost classifications
3. Costs of Quality

33
1. Basic manufacturing cost categories

Direct Direct Manufacturing

Materials Labor Overhead

The Product

34
 Direct Materials

Raw materials that become an integral

part of the product and that can be
conveniently traced directly to it.

Example: A radio installed in an automobile

35
 Direct Labor

Those labor costs that can be easily traced

to individual units of product.

Example: Wages paid to automobile assembly workers

36
 Manufacturing Overhead

Manufacturing costs that cannot be traced

directly to specific units produced.

Examples: Indirect materials and indirect labor

Materials used to support the Wages paid to employees

production process.
Examples: lubricants and cleaning
supplies used in the automobile
assembly plant.
who are not directly involved
in production work.
Examples: maintenance
workers, janitors and security
guards.

37
 Classifications of Costs

Manufacturing costs are often

classified as follows:
Direct Direct Manufacturing
Material Labor Overhead

Prime Conversion
Cost Cost

38
 Nonmanufacturing Costs

Selling Administrative
Costs Costs

Costs necessary to secure All executive,

the order and deliver the organizational, and clerical
product. costs.

39
 2. Understand cost classifications

Product costs include direct Period costs include all selling

materials, direct labor, and costs and administrative
manufacturing overhead. costs.

40
 Quick Check 

Which of the following costs would be

considered a period rather than a product
cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
41
 Comparing Merchandising and
Manufacturing Companies
Merchandisers . . . Manufacturers . . .
Buy finished goods. Buy raw materials.
Sell finished goods. Produce and sell
finished goods.

MegaLoMart

42
 Balance Sheet

Merchandiser Manufacturer
Current assets Current Assets
 Cash
Cash
 Receivables
Receivables
 Inventories
Merchandise • Raw Materials
Inventory • Work in Process
• Finished Goods

43
 Balance Sheet

Merchandiser Manufacturer
Current assets Current Assets
 Cash  Cash waiting to be
Materials
 Receivables  Receivables
processed.
 Merchandise Inventory  Inventories
Partially complete
products—some • Raw Materials
material, labor, or • Work in Process
overhead has been • Finished Goods
added.
Completed products
awaiting sale.

44
 Prepare an income statement including
calculation of the cost of goods sold

Before the preparation of income statement, let’s learn

Basic Equation for Inventory Accounts

Withdrawals
Beginning Additions Ending
+ = + from
balance to inventory balance
inventory

45
 Quick Check 

If your inventory balance at the beginning of

the month was $1,000, you bought $100
during the month, and sold $300 during the
month, what would be the balance at the end
of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.
46
 The Income Statement
Cost of goods sold for manufacturers differs only slightly
from cost of goods sold for merchandisers.

Merchandising Company Manufacturing Company

Cost of goods sold: Cost of goods sold:
Beg. merchandise Beg. finished
inventory $ 14,200 goods inv. $ 14,200
+ Purchases 234,150 + Cost of goods
Goods available manufactured 234,150
for sale $ 248,350 Goods available
- Ending for sale $ 248,350
merchandise - Ending
inventory (12,100) finished goods
= Cost of goods inventory (12,100)
sold $ 236,250 = Cost of goods
sold $ 236,250

47
 Prepare a schedule of cost of goods
manufactured

2 Steps
Calculates the cost of raw material, direct
labor, and manufacturing overhead used in
production (i.e., total manufacturing costs)

Calculates the manufacturing costs associated

with goods that were finished during the
period.

48
 Prepare a schedule of cost of goods
manufactured
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials

materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
– Ending raw materials

As items are removed from raw materials

inventory
= Raw materials used
in production inventory and placed into the production
process, they are
called direct materials.
49
 Prepare a schedule of cost of goods
manufactured
Manufacturing Work
Raw Materials Costs In Process
Conversion costs
Beginning raw Direct materials
are costs incurred
materials inventory + Direct labor
+ Raw materials + Mfg. overhead to convert the
purchased = Total manufacturing direct material
= Raw materials costs
into a finished
available for use
in production product.
– Ending raw materials
inventory
= Raw materials used
in production

50
 Prepare a schedule of cost of goods
manufactured
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials
inventory All manufacturing costs incurred during the
= Raw materials used period are added to the beginning balance
in production
of work in process.

51
 Prepare a schedule of cost of goods
manufactured
Manufacturing Work
Raw Materials Costs In Process

Beginning raw Direct materials Beginning work in

materials inventory + Direct labor process inventory
+ Raw materials + Mfg. overhead + Total manufacturing
purchased = Total manufacturing costs
= Raw materials costs = Total work in
available for use process for the
in production period
– Ending raw materials – Ending work in
Costs associated with the goods that are
inventory process inventory
= Raw materials used = Cost of goods
completed during the period are transferred
in production manufactured
to finished goods inventory.

52
Prepare a schedule of cost of goods
manufactured
Work
In Process Finished Goods

Beginning work in Beginning finished

process inventory goods inventory
+ Manufacturing costs + Cost of goods
for the period manufactured
= Total work in process = Cost of goods
for the period available for sale
– Ending work in - Ending finished
process inventory goods inventory
= Cost of goods Cost of goods
manufactured sold

53
 Manufacturing Cost Flows *important*

Balance Sheet Income

Costs Inventories Statement
Expenses
Material Purchases Raw Materials

Direct Labor Work in

Process
Manufacturing
Overhead Finished Cost of
Goods Goods
Sold
Selling and Period Costs Selling and
Administrative Administrative
54
 Quick Check 

Beginning raw materials inventory was $32,000.

During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material used?
A. $276,000
B. $272,000
C. $280,000
D. $ 2,000

55
 Quick Check 

Direct materials used in production totaled $280,000.

Direct labor was $375,000 and factory overhead was
$180,000. What were total manufacturing costs
incurred for the month?
A. $555,000
B. $835,000
C. $655,000
D. Cannot be determined.

56
 Quick Check 

Beginning work in process was $125,000.

Manufacturing costs incurred for the month were
$835,000. There were $200,000 of partially
finished goods remaining in work in process
inventory at the end of the month. What was the
cost of goods manufactured during the month?
A. $1,160,000
B. $ 910,000
C. $ 760,000
D. Cannot be determined.

57
 Quick Check 

Beginning finished goods inventory was $130,000.

The cost of goods manufactured for the month was
$760,000. And the ending finished goods inventory
was $150,000. What was the cost of goods sold for
the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.

58
 Understand cost classifications used to
predict cost behavior:
variable costs and fixed costs
How a cost will react to changes in the level of
activity within the relevant range.
– Total variable costs change when activity
changes.
– Total fixed costs remain unchanged when
activity changes.

59
 Variable costs

The total cost of batteries is based on the number of

autos produced in a month

Total cost of batteries

Number of autos
produced in a month
60
 Variable cost per unit

The cost of battery is constant per each auto

produced

Cost of battery per auto

Number of autos
produced in a month
61
 Fixed costs

The monthly rent for an auto factory is fixed

regardless of the number of autos produced
Monthly rent

Number of autos produced in a

month 62
 Fixed cost per unit

The average monthly rent per auto decreases as more

autos are produced

Unit cost of rent for each

auto produced

Number of autos produced in

a month 63
 Cost Classifications for Predicting Cost
Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.

64
 Quick Check 

Which of the following costs would be variable with

respect to the number of cones sold at a Baskins &
Robbins shop? (There may be more than one correct
answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.

65
 Understand cost classifications used for
assigning costs to cost objects: direct and
indirect costs
Direct costs Indirect costs
• Costs that can be • Costs that cannot be
easily and conveniently easily and conveniently
traced to a unit of traced to a unit of
product or other cost product or other cost
object. object.
• Examples: direct • Example:
material and direct manufacturing
labor overhead

66
 Understand cost classifications used in
decision-making: differential, opportunity
and sunk costs
• Every decision involves a choice between at
least two alternatives.

• Only those costs and benefits that differ

between alternatives are relevant in a
decision. All other costs and benefits can and
should be ignored.

67
 Differential costs and revenues

Differential costs and revenues are

costs and revenues that differ among alternatives.

Example: You have a job paying $1,500 per month in your

hometown. You have a job offer in a neighboring city that
pays $2,000 per month. The commuting cost to the city is
$300 per month.

Differential revenue is: Differential cost is:

$2,000 – $1,500 = $500 $300

68
 Opportunity costs

The potential benefit that is given up

when one alternative is selected over
another.
Example: If you were
not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for one
year is $15,000.

69
 Sunk costs

Sunk costs have already been incurred and cannot be

changed now or in the future. These costs should be
ignored when making decisions.

Example: You bought an automobile that cost $10,000

two years ago. The $10,000 cost is sunk because whether
you drive it, park it, trade it, or sell it, you cannot change
the $10,000 cost.

70
 Quick Check 

Suppose you are trying to decide whether to drive or

take the train to Kuala Lumpur to attend a concert.
You have ample cash to do either, but you don’t
want to waste money needlessly. Is the cost of the
train ticket relevant in this decision? In other words,
should the cost of the train ticket affect the decision
of whether you drive or take the train to Kuala
Lumpur?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not relevant.
71
 Quick Check 

Suppose that your car could be sold now for $5,000.

Is this a sunk cost?

A. Yes, it is a sunk cost.

B. No, it is not a sunk cost.

72
 3. Quality Cost

Conformance is when the overwhelming majority

of products produced conform to design
specifications and are free from defects. However,
product or service conformance, comes at a cost.

73
 Quality Cost

Support activities whose

Prevention Costs purpose is to reduce the
number of defects

Incurred to identify
defective products
Appraisal Costs before the products are
shipped to customers

Prevention Costs Appraisal Costs

• Testing and inspecting
• Quality training
incoming materials
• Quality circles
• Final product testing
• Statistical process
• Depreciation of testing
control activities
equipment
74
 Quality Cost

Incurred as a result of
Internal Failure
identifying defects
Costs before they are shipped

Incurred as a result of
External Failure defective products
Costs being delivered to
customers

External Failure Costs

Internal Failure Costs
• Cost of field servicing and
• Scrap
handling complaints
• Spoilage
• Warranty repairs
• Rework
• Lost sales
75
Quality Cost

76
 In-class Discussion
Variable and Fixed Costs
A number of graphs
displaying cost behavior
patterns are shown. The
vertical axis on each graph
represents total cost, and
the horizontal axis
represents level of activity
(volume).

For each of the following

situations, identify the
graph that BEST illustrates
the cost behavior pattern
involved. Any graph may
be used more than once.
77
 In-class Discussion
Variable and Fixed Costs
a. Cost of one type of raw material used in production
b. Electricity bill—a flat fixed charge, plus a variable cost after a certain
number of kilowatt-hours are used.
c. City water bill, which is computed as follows:
First 1,000,000 gallons or less $ 1,000 flat fee
Next 10,000 gallons $ 0.003 per gallon used
Next 10,000 gallons $ 0.006 per gallon used
Next 10,000 gallons $ 0.009 per gallon used
d. Depreciation of equipment, where the amount is computed by the
straight-line method.
e. Rent on a factory building donated by the city, where the agreement
calls for a fixed fee payment unless 200,000 labor-hours or more are
worked, in which case no rent need be paid.
78
 In-class Discussion
Variable and Fixed Costs
f. Salaries of a few maintenance workers, where one maintenance worker
is needed for every 1,000 hours of machine—hours or less (that is, 0 to
1,000 hours requires one maintenance worker, 1,001 to 2,000 hours
requires two maintenance workers, etc.).
g. Rent on a factory building donated by the county, where the agreement
calls for rent of $100,000 less $1 for each direct labor—hour worked in
excess of 200,000 hours, but a minimum rental payment of $20,000 must
be paid.
h. Use of a machine under a lease, where a minimum charge of $1,000 is
paid for up to 400 hours of machine time. After 400 hours of machine
time, an additional charge of $2 per hour is paid up to a maximum charge
of $2,000 per period.

79
End of Lecture 1