GROUP 4 CAMILO FRANCO S. CABUSAS ROEL C. BRION Narcio “Don” D. Isidro Jr.

INTRODUCTION TO MANAGEMENT ACCOUNTING SFAS #1 (Statements of Financial Accounting Standards) Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decision. What is accounting?

Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information. American Accounting Association

Users of Accounting Information Managers Employees Shareholders & potential investors Creditors Government Internal External

Two categories of users of accounting information Internal parties within the organization External parties such as shareholders, creditors And regulatory agencies outside the organizations

is concerned with the provision of information to people within the organization to help them make better decisions and improve the efficiency and effectiveness of existing operations. It is also called internal accounting. Management Accounting

Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. * *

Financial Accounting is concerned with the provision of information to external parties outside the organization. It is also called external accounting.

Differences between Financial and Management Accounting Financial Management Legal Requirements Focus on individual parts or segments Generally Accepted Acctg. Principles (GAAP) MandatoryOptional Whole Small parts of segments In conformity with (GAAP) Not required to adhere to (GAAP) Time Dimension Past transactionsFuture information Report Frequency Annually Daily, weekly or monthly intervals

What is decision making? Decision makings means choosing from at least two alternative courses of action.

Categories of non-routine decision making 1.Short-term Accept or reject special order or a business proposal Sell or process further product line Make or buy a part, subassembly or product line Continue operating or close a business segment Product combination Utilization of scarce resources Change in Profit factors

Long-term capital budgeting or capital investment Replacement Improvement Expansion

Decision-making, planning and control process 1. Identify objective 2. Search for alternative courses of action 3. Gather data about alternatives 4. Select alternatives courses of action 7. Respond to divegencies from plan 6. Compare actual and planned outcomes 5. Implement the decisions

Functions of Management Accounting Allocate costs between cost of goods sold and inventories for internal and external profit reporting. Provide relevant information to help managers make better decisions. Provide information for planning, control and perfofmance measurement

Distinction between cost accounting and management accounting Cost accounting is concerned with cost accumulation for inventory valuation to meet the requirements of external reporting and internal profit measurements. Management accounting relates to the provision of appro- priate information for decision-making, planning, control and performance evaluation.

INTRODUCTION TO COST TERMS AND CONCEPTS Direct and indirect costs Direct are those cost that can be specifically and exclusively identified with a particular cost object. Indirect costs are those cost cannot be identified specifically and exclusively with a given cost object. Example: Materials and Direct Labor Example: Manufacturing Overhead

Materials Labor Overhead Prime Cost Conversion Cost

Period and Product costs Product Cost are those cost that are identified with goods purchased or produced for resale. They are the costs that are attached to the product and included in the inventory valuation. Period Cost are those cost that are not included in the inventory valuation and as a result are treated as expenses in the period in which they are incurred

Variable and Fixed Cost Variable Cost are costs that change directly and proportionately with the level of activity. Units ProducedCost per unitTotal cost 800P5.00P4, P5.00P7, P5.00P5,000.00

Fixed Cost are costs that do not change with changing levels of activity. Units ProducedCost per unitTotal cost 800P25.00P20, P13.33P20, P20.00P20,000.00

Relevant and irrelevant cost Relevant Costs are future costs that are expected to be different under each alternative course of actions. Characteristics of relevant costs 1.They are expected future costs, AND 2.They are different between decision alternatives Irrelevant Costs are future costs that are will not change under each alternative course of actions.

Example: Company ABC received an order from a customer product x. Do not accept order Accept order Materials Sales Revenue(250.00) Conversion Cost Net Profit50.00

Avoidable Cost Avoidable Cost are those cost that may be saved by not Adopting a given alternative, whereas Unavoidable costs cannot be saved. Do not accept order Accept order Materials Sales Revenue(250.00) Conversion Cost Net Profit50.00

Sunk cost Sunk costs refer to the non-recoverable costs incurred in the past. They are considered irrelevant for decision making purposes, for aside from being a past cost, they are not expected to change among alternatives choices. Example: Book value of an old equipment purchased in the past.

Opportunity Cost Opportunity Cost refer to the income or benefit sacrificed or forgone when an alternative is chosen. Present Salary Mr. X12, Offered Salary Abroad 100,000.00

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