Managerial accounting fundamental concepts and costing systems for cost analysis module 1

MANAGERIAL ACCOUNTING COST BEHAVIORS, SYSTEMS, AND ANALYSIS with Gary Hecht

Introduction to Managerial Accounting and Costing Concepts

Course Introduction and Concept Overview

LESSON 1-1 OBJECTIVES You will understand: What managerial accounting is Why managerial accounting is important Contemporary issues

WHAT IS MANAGERIAL ACCOUNTING?

“The process of obtaining, creating, and analyzing relevant information to help achieve organizational goals.”

COMMON CONCEPTIONS

Tax returns

Financial statements

FINANCIAL STATEMENT USERS Creditors and potential creditors

Investors and potential investors Suppliers, customers, other partners Tax authorities

Organization

Competitors

Regulatory agencies

WHAT’S THE DIFFERENCE? Financial accounting

Managerial accounting

Internal and external users

Internal users

General, aggregated financial statements

Detailed, specialized for a specific decision, setting, etc.

Reporting of the past; historical

Designed for future decisions

Guided by principles, standards, and rules (generally accepted accounting principles)

Case-specific; best practices

WHY IS MANAGERIAL ACCOUNTING IMPORTANT? Facilitates decisions Creates, organizes, and shares the right information to allow for the best decision

Guides/Influences decisions Helps align managers’ and employees’ decisions with what is best for the firm

BY THE WAY . . .

What types of organizations? “Information�?

Focus on measurement Quantitative Currency-based Alternatives?

CONTEMPORARY ISSUES Global organizations Value chain and strategic alliances Social considerations Ethics

WHAT WE’VE LEARNED IN LESSON 1-1 Definition and distinction of managerial accounting Purpose of managerial accounting within organizations Contemporary issues

Costing Concepts

LESSON 1-2 OBJECTIVES

You will understand: Basic terminology How to organize costs according to type Cost behavior basics

TERMINOLOGY Cost Just money?

“Usage of resources”

Cost Object Product Can be anything

COST FRAMEWORK 1 OBJECTS Organization of costs by relation to cost object Direct costs Materials Labor

Indirect costs Necessary, but difficult/infeasible to trace to the cost object “Catch-all” category

INDIRECT COSTS Example scenario Overhead In multiple-product scenarios, how overhead is allocated to products influences the perceived cost of the product If arbitrary or inaccurate, may lead to poor decisions

COST FRAMEWORK 2 BEHAVIOR

For decision making, we’ll often find it useful to classify costs based on “cost behavior” That is, how costs are associated with some activity of interest

ROLE OF COST BEHAVIOR Determine product profitability (i.e., choose among potential products to produce) Determine whether to change product price Determine whether to add/drop a product line Determine whether to outsource

BASIC IDEA

Total Cost = Fixed Costs + Variable Costs Variable Costs Per “Activity” x Volume of “Activity”

EXAMPLE SCENARIO

Variable cost per unit = $1 Fixed costs are $100,000 Production volume = 1 to 100,000

COST

COST BEHAVIOR – TOTAL VARIABLE COSTS

Total variable costs increase with production volume PRODUCTION VOLUME

UNIT COST

COST BEHAVIOR – UNIT VARIABLE COSTS

Unit variable costs do not change with production volume

PRODUCTION VOLUME

TOTAL COST

COST BEHAVIOR – TOTAL FIXED COSTS

Total fixed costs do not change with production volume

PRODUCTION VOLUME

COST

COST BEHAVIOR – UNIT FIXED COSTS

Unit fixed costs vary with production volume PRODUCTION VOLUME

EVERYTHING’S LINEAR?

UNIT COST

COST BEHAVIOR – UNIT VARIABLE COSTS

Unit variable costs do not change with production volume

PRODUCTION VOLUME

TOTAL COST

COST BEHAVIOR – TOTAL FIXED COSTS

Total fixed costs do not change with production volume

PRODUCTION VOLUME

TOTAL COSTS

EVERYTHING’S LINEAR?

Relevant range for which linear patterns are valid

Normal activity range UNITS PRODUCED

WHAT WE’VE LEARNED IN LESSON 1-2 Terminology Even the most basic concepts – such as “costs” – are not that simple

Different ways to organize cost information Relationship with cost object (direct vs. indirect) Relationship with activity of interest (behavior)

WHAT WE’VE LEARNED IN MODULE 1 Definition, purpose, and distinction of managerial accounting Contemporary issues Basic concepts How to organize cost information according to multiple cost frameworks