managerial accounting 16th edition pdf

managerial accounting 16th edition pdf

Exploring the Principles and Practices of Managerial Accounting: A Comprehensive Guide

1. Introduction to Managerial Accounting

Which stimulates our interest in why accounting is often called “the language of business”? What do accountants do? What do cost, budget, profit, or cash flow mean? What are the numbers that accountants provide and what are they for? How are these numbers arrived at and how can they be used? These and others are the questions that are normally answered in a subject called managerial accounting, which is provided at the undergraduate, post-graduate, and professional courses for business studies. Since managerial decisions usually need the help of cost analysis, this is why the subject is often referred to as managerial cost accounting. This unit aims at exploring the principles and practices of managerial accounting. From the practical perspective, it looks into how the public and profit-oriented private sector organizations use managerial accounting to assist in the process of making management decisions. It also equips students with the necessary technical skills to make both simple and complex managerial accounting.

The role of a manager goes not only beyond controlling the day-to-day operations but also requires decision making. Hence, to make decisions effectively, managers need to have an adequate understanding of accounting and finance. This is because a good grounding in accounting and finance is an essential requirement for any manager. Nevertheless, far too many managers perceive accounting to be too complicated, impenetrable, and (to many) boring, and hence enjoyable only to the accountants themselves. This often leads to managers not being financially literate and relying on the accountants and other financial specialists to provide them with a lot of financial information and analysis upon which they base their decision making.

2. Cost Concepts and Cost Behavior

The formula for calculating cost is: cost = variable cost + (variable cost per unit) * (activity). The formula for calculating total cost is: total cost = fixed cost + variable cost * (quantity). Manufacturing costs include all costs associated with the production of physical assets. This includes direct labor, direct materials, and manufacturing overhead. Non-manufacturing costs include selling and administrative costs. Semi-variable costs: these costs are fixed over a limited activity range but are variable within a range that is expanded at a subsequent higher level of activity. Norms can be organized by controlling and controlled plant performances. Break-even point: it is the point or level of operation at which business operations turn from incurring a net loss into a net income. The break-even point is at the intersection or point where the total costs curve, regardless of the nature of this curve, would end up being in the first quadrant, the total revenues curve. Marginal cost = variable cost / marginal cost unit.

A logical starting point for analyzing cost-volume-profit relationships is to examine costs and relationships in terms of their behavior. Attempts to understand the behavior of the different types of costs usually begin by focusing on cost classification and, in particular, the distinction between variable costs. In many settings, costs increase as the activity level increases. Materials used to make products, sales commissions, direct labor, office supplies, and repair costs are examples of costs that are often influenced by changes in the level of production or sales. When costs vary with the level of activity, they are called variable costs. Variable costs in total increase with the level of activity. On a per unit basis, however, variable costs remain the same. Mixed costs are costs that have both a fixed and a variable component. Its elements are similar to fixed elements, in that total costs tend to rise with the increase of the level of business activities, but it also includes other than fixed elements, which is usually based on the number of products produced or sales produced. The presence of both fixed and variable portions of a mixed cost can make the estimation of the total cost complex. Several methods used to estimate mixed costs and relations include the high-low method, scatterplot method, and regression analysis.

Costs are essential for managerial decisions. Costs may be essentially direct and indirect. Direct costs are associated with a specific cost objective, whereas indirect costs are associated with more than one cost objective and therefore cannot be directly assigned to a class of product or service. Costs may also be explicit or implicit. Explicit costs require an outlay of money, whereas implicit costs arise as a result of using resources in the business. Cost classifications also depend explicitly on product costs. Explicit costs arise from the purchase or primary production of physical or acquired assets, including materials and labor. Explicit costs are capitalized and appear on the balance sheet, and costs appear on the income statement after consumption. Explicit costs are separated through a cost-consumption model. Initially, costs are capitalized and later expensed. Product costs include costs associated with the production of a product or service, including direct materials, direct labor, and manufacturing overhead. Product costs are capitalized and appear in inventory accounts. Period costs are all costs in the income statement other than costs of goods sold. Product costs are allocated out the expenses in the income statement. Product costs are also called inventoriable costs, whereas period costs are not inventoriable costs. Period costs are expenses when incurred.

3. Cost-Volume-Profit Analysis

The cost-volume-profit (C-V-P) approach has several practical advantages that have made it the most widely accepted tool. First, the basic principle of the approach – that costs and revenues are linear functions of volume (or possibly some other cost driver) – are simple and generally perceived to be realistic. Moreover, these cost-volume-revenue functions are found to have meaning and to be capable of useful and valid estimation in a wide variety of businesses, both large and small, service as well as manufacturing, and newer as well as older companies.

The general nature of costs, income, and expenses often is a fundamental concern in business. The reason for this concern is simple: underlying every business decision are determinations about the ability to cover or service the costs of performing an activity and determine the amount of surplus or profit to be earned by the performance. Often, this decision-making activity involves assumptions about the relationship between the costs and output of a given activity; that is, the activity’s cost structure must be estimated, and estimates must be available concerning the total costs of inputs and outputs associated with the activity. The cost-activity relationship also provides insights into how well an organization is achieving its objectives, how these relationships may be expected to change over time in response to changed circumstances, and how the organization may logically choose alternative objectives in order to respond to changing situations. Therefore, accountants and financial managers are frequently called upon to perform cost-activity research and analysis, which underlies the many breeds of accounting reports that are prepared throughout the business world.

4. Budgeting and Performance Evaluation

Budgets control resources, set goals and objectives, and provide measures by which performance can be evaluated. The budget process is a way to communicate what is important and what will be expected for the next year. The budget process fuses together the organizational objectives with the management process. The formal budget, also known as the financial budget, is for managers and employees and indicates where resources are expected to be used. There are two types of budgets: line item and program budgets. Line item budgets provide very detailed breakdowns of expenses, and resources are focused solely on subunit’s activities. Program budgets are generally much more flexible and allow users to move resources from function to function with greater ease. It is an outgrowth of the budget process and is a decision-making want based on a cost-benefit analysis. Performance budgeting works well in organizations whose primary outputs are not physical in nature and when the output can be linked to procedure costs.

Budgeting is the formal process of developing a set of financial plans that outline an organization’s objectives and expectations over a future period. This formal process increases the probability of a successful outcome and provides measures by which performance can be evaluated. Managers spend a great deal of time and effort developing budgets and believe that a formal budgeting process will help improve performance. The budgeting process provides managers with an opportunity for continued improvements or tight controls on what the unit will do. A budget is the principal method that helps control the resources a manager has at its disposal and may be the only indication of what will be expected of the unit. In this chapter, we provide an understanding of the role a budget plays in the management process and the various interactions it has with employees and other managers.

5. Strategic Decision Making and Managerial Control Systems

Some firms have the ability to collectively outthink their competitors, which enables them to consistently anticipate and react more quickly and effectively to changes in their industry conditions. These firms have developed the abilities inherent in strategic decision making. High-growth industries in today’s global economy make this ability all the more critical. How long can a firm stay ahead in one of these industries causing its managers to be out of touch with market conditions or asleep at the management control switch? The answer: not long! Such firms, which have the ability to anticipate and manage industry change effectively, have developed the ability to adapt to rapidly changing business conditions and sustain superior earnings growth in the long term. The characteristics and behaviors of managers who are associated with such firms reflect these abilities. For a firm to successfully manage an ever-changing environment and remain competitive, the methods and processes built into its strategic decision-making systems must be flexible. This flexibility enables the firm to align its activities to accomplish the objectives that management has established to produce competitive success.

The terms strategic decision making and managerial control systems are the primary topics addressed in this section. Managerial accounting plays a central role in both the strategic decision-making and managerial control functions. This section of the text describes the three core elements of the strategic decision-making model: strategy identification, strategic planning and budgeting, and strategy implementation and feedback. The chapter also explains the essential principles of developing managerial control systems, the measurement process, purposes and uses of control systems in organizations, the processes by which control systems are constructed, and the benefits of the control system development process. Control systems utilized in for-profit firms diverge from those employed in not-for-profit entities. The section also provides a brief review of the chapter’s main points and approaches.