Managerial Accounting A Brief Review Robert M. Hayes 2005

Overview §The Components of AccountingThe Components of Accounting §Objectives of Managerial AccountingObjectives of Managerial Accounting §Categories of CostsCategories of Costs §Cost-Volume Breakeven AnalysisCost-Volume Breakeven Analysis §Cost Accounting for Programs and ServicesCost Accounting for Programs and Services §Cost Accounting in Managing Routine OperationsCost Accounting in Managing Routine Operations §Cost Accounting in Managing Non-Routine OperationsCost Accounting in Managing Non-Routine Operations

The Components of Accounting §Financial Accounting l Maintain records of income and outgo l Reports internally to management for financial control l Reports externally to owners and government for accountability §Managerial Accounting l Provides the data needed to support management §Cost Accounting l Provides the detailed assignment of costs to functions, services, and products l Is the basis for managerial accounting l Is the basis in financial accounting for inventory evaluation

Objectives of Managerial Accounting §(1) operational management of current, routine operations §(2) operational management of non-routine operations §(3) tactical management (i.e., assignment of resources) in support of all operations §(4) strategic management in formulating major plans and policies §(5) reporting to interested parties outside the library

Categories of Costs §Total Costs and Unit CostsTotal Costs and Unit Costs l Units of production (cost per unit) l Units of users (cost per user) §Fixed Costs and Variable CostsFixed Costs and Variable Costs l Fixed costs relating to a time period l Fixed costs relating to a range of activity §Program Costs and Process CostsProgram Costs and Process Costs l Program (e.g., product or service area) l Processes or functions §Direct Costs and Indirect CostsDirect Costs and Indirect Costs §Production Costs and Delivery CostsProduction Costs and Delivery Costs §Controllable Costs and Uncontrollable CostsControllable Costs and Uncontrollable Costs §Budgeted Costs and Actual CostsBudgeted Costs and Actual Costs

Total Costs vs. Unit Costs: Units of Production or of Delivery §Total costs l Accumulation by classification (e.g., materials, labor, overhead) l Allocation to cost objectives (e.g., departments or products) §Unit costs l The choice of units, whether of production or of delivery, depends upon the purpose. l If the focus is on internal efficiency, use units of production (e.g., “cost per title”) l If the focus is on external effectiveness, use units of delivery (e.g., “cost per user”).

Fixed vs. Variable Costs: Breakeven Analysis §In a Profit-oriented Context l Volume of production and fixed vs. variable costs l Income per unit and break-even point §In a Library Context l Collection costs vs. services costs l Implementation of an Automated System vs. usage costs l Implementation of a Fee-for-Service vs. usage costs

Program Costing vs. Process Costing: Pricing Decisions §Program costing applies when there are identifiable, discrete areas of production or delivery. Process costs are accumulated for each unit of production and the total becomes the unit cost. The costs for one program or unit may then be different from those for another. Those differences might imply a different price for each unit. §Process or functional costs are applicable when the units flow, virtually continuously, through successive production and delivery stages. The costs for a given process are accumulated over all units of production, and the total becomes the cost for that process. The costs for one process may then be different for those for another. But the costs and therefore price for units will be equal.

Direct vs. Indirect Costs: Rules for Allocation §Accounting for Direct Costs §Accounting for Indirect Costs l Tracing Overhead to Product or Services l Fixed overhead and variable overhead l Applying based on labor costs or total costs l Annualized Rates or monthly rates l Under or Over-applied Overhead

Budgeted Costs vs. Actual Costs: §Budgeted costs as the basis for: l Planning and allocation l Expectations and accountability l Communication and coordination l Pricing and sales forecasting §Standard costs as the basis for budgeted costs §Actual costs as the basis for assessment and calibration l Responsibility accounting l Management information systems

Managing Routine Operations §Budgeting §Forecasting §Standard Costs l As a Management Tool l In Product and Service Costing §Factors Affecting Costs l Types of Variable Costs l Type of Fixed Costs l Types of Mixed Costs §Responsibility Accounting §Performance Measurement

Managing Non-Routine Operations §Accounting in Support of Special Decisions l Environmental scan (alerting to potential problems) l Identifying special situations (exception reporting) l Dealing with special situations (decision-making) l Monitoring special situations (oversight reporting) §In-house or Out-source (Make or Buy) Decisions §Capital Budgeting l Discounted cash flow (net present value accounting) l The choice of discount rate l Uncertainty and sensitivity analysis l Alternative to DCF: Payback period, Rate-of-return

Cost Accounting in Library Decision-Making §Few, if any, libraries have implemented a cost-accounting system. As a result the kind of data it would provide to support library management simply are not available, at the least, not readily so. §As a substitute for an operational cost-accounting system, the Library Planning Model incorporates cost-accounting and provides a structure within which it can be used as a basic tool to support library decision-making.

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