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