Cost-Volume-Profit Analysis utilities, insurance of

the factory
● Cost
○ Classification ● Period cost
■ Assoc w/ cost object ● Product Cost
■ Presentation in FS ○ Incurred in factory
■ Behavior ○ Product materials
○ SCI → cost of goods sold (won’t
appear here)
● Pay ● Inventory → SFP → inventory
● Expenses incurred → to gain profit ● Period
● Input expenses ○ The rest that is not product cost
○ Operating expenses
● Revenue - sales, ordinary earnings ■ General and
● Income - revenue + gain administrative -
● Gain - extraordinary depreciation of
● Profit = Net Income - income - expenses equipments in the
office, salaries of the
● Management account definition of cost people in the office
○ Anything that you have to give ■ Selling and distribution
up in order to gain something - sales or marketing of
○ Qualitative and non-measurable product
■ Finance cost - interest
● Foregoing benefits (quantitative) when expense
not choosing Taylor Swift over Ben and ■ Income tax expense
Ben - opportunity cost ● Freight out - SD
● Freight In - Product
● Cost object - anything that you want to
determine the cost
○ Direct Activity Level/ cost driver → Total Cost
■ Direct material - ● 500 kwh - P2 kwh = P1000
physically, economically, ● 400 kwh - P2 kwh = P800
functionally traceable ○ Variable cost - cost changing
■ Direct labor - wages depending on the production
salaries or payments level, activity level, cost driver
who directly work in ● Mixed cost - fixed + variable
manufacturing
○ Indirect - shared/allocated with ● Depreciation - depends on
other products; immaterial depreciation method/formula
■ Indirect material - nails
in an arm chair
● Step-cost - hybrid of mixed cost
■ Indirect labor -
supervisors, quality
○ Tax rates of train law
control
specialists/inspectors,
security officer
■ Other product costs -
factory overhead,
depreciation, electricity,
Management ○ Evaluate the operations of the
● It is the judicious use of means to entity during a year and
accomplish an end compare the budget
● It refers to the set and study of forecasted and the actual
principles on the administration of budget used
an organization
Objectives of Managerial Accounting Activity
Management Functions ● Providing information for decision
● Planning making and planning
● Organizing ● Assisting managers in directing and
● Leading controlling operational activities
● Evaluating/Controlling ● Motivating managers and other
employees toward the organization’s
Management Accounting goals
● It is the process of identifying, ● Measuring the performance of
measuring, analyzing, interpreting, activities, subunits, managers, and
and communicating information in other employees within the
pursuit of an organization’s goals organization
○ Short-term goals ● Assessing the organization’s
○ Long-term goals competitive position and working
○ Permanent goals with other managers to ensure the
● End goal: prepare financial organization’s long-run
statements competitiveness in the industry
○ Identifying
○ Measuring Management Accounting vs. Financial
○ Analyzing Accounting
○ Interpreting ● Users
○ Communicating ○ Management - managers and
● Come out with a process to achieve people within the
the goals of the business organization
○ Financial - interested parties
Management Accountants and those outside the
● They are specialists in using the organization
tools of managerial accounting to ● Regulation
help the organization and its ○ Management - Unregulated
managers run the operation ○ Financial - Conforms to the
effectively generally accepted
accounting principles and
Role of management accounting standards
● Planning ● Mandatoriness
○ Preparation of budget ○ Management - Not required
■ Includes forecast of ○ Financial - Required by law
the expected and regulatory bodies
operations (cost, ● Source of data
profit, revenue, salary) ○ Management - Accounting
● Controlling/Evaluating system
 ○ Other sources which provide accounting teams are Certified
financial data Public Accountants (CPAs)
○ Nonfinancial data ● In the Philippines, the primary
○ Financial - Accounting requisition for a CPA license is upon
System those who do audits of financial
● Nature of Reports reports and to further increase the
○ Management - Generally reliability of work of people from
focused on subunits within finance and accounting
the organization ● These concepts generally provide
○ Based on combination of increase in credibility in external
historical data, estimates, aspects of the business, e.g.,
and projections/forecasts financial reporting
○ Financially - generally ● To focus on best practices and new
focused on the enterprise in developments in accounting and
its entirety finance inside of comapnies, the
○ Based almost exclusively on managerial accounting profession
historical transactional data has its own certifications and
organizations
Similarity ● Institute of Management
● They draw information from an Accountants (Philippines and
organization’s cost of accounting Abroad)
system ● Chartered Institute of Management
Accountants (US)
Cost management system ● Requirements
● It is a management planning and ○ Two-year professional
control system with the following experience in management
objectives: accounting or financial
○ Measure the cost of resources management
consumed in performing the ○ Educational requirements
organization’s significant ■ Bachelor’s degree
activities from an accredited
○ Identify and eliminate non- college/university
value-added costs ○ Passing the rigorous CMA
○ Determine efficiency and examination
effectiveness of major ■ Financial planning,
activities performance and
○ Identify and evaluate new analytics
activities that can improve ■ Strategic financial
the future performance of an management
organization
Management consultant
Introduction to management consultancy ● It refers to a person, qualified by
education, experience, technical
Certified Management Accountant ability, and temperament to advise or
● Many managerial accountants and assist businessmen on a
members of corporate finance and professional basis, in identifying,
 defining, and solving specific
management problems involving the Development and Execution
organization, planning, direction, ● Negotiating the engagement
control and operation of form ● Preparing for and starting the
engagement
Not an employee ● Conducting the engagement
● Since he is not an employee of the ● Preparing and presenting the reports
organization, he can effectively serve and recommendations
as its objective and impartial adviser ● Implementing the recommendations
● Evaluating the engagement
Practitioners ● Post-engagement follow-up
● Management consulting is not
limited to Certified Public ____________________________
Accountants
● Any professional may practice the Cost
same, as long as he has the required ● Cost refers to the resources sacrified
competence, experience, and or foregone to achieve a specific
technical ability to solve business objective. It is measure as the
problems monetary amount that must be paid
● The practice and the practitioners are to acquire goods or services
not licensed nor require admission
requirements by a board or through Cost Management System
certification ● A cost management system is a set
of formal methods developed for
Reasons for hiring management consultants planning and controlling and
● To help define specific problems and organization’s cost-generating
develop solutions activities relative to its strategy,
● To provide specialized skills and goals and objectives
experience
● To provide confidential service in Cost Classification Categories
which the identity of the client is ● Associationg with Cost Object
concealed ○ Direct cost
● To train client personnel ○ Indirect cost
● To provide temporary personnel ■ Allocable to multiple
● To help improve intra-company units
communications ■ Not direct to the use
● To render an independent opinion of the object (not
● To help get results visible to the final
product)
General areas of management services ○ Check if:
● General management consultation ■ Physically traceable
● Project feasibility study ■ Economically
● Organization and personnel traceable
● Industrial engineering ● Reaction to changes in activity
● Marketing (behavior)
● Operations research ○ Variable cost
 ○ Fixed cost
○ Mixed cost
○ Step cost Relevant range
● Classification on Financial ● It refers to the band of activity within
Statements which the identified cost behavior
○ Product cost patterns are valid
○ Period cost ● Any level of activity outside this
○ Expired cost range may have different cost
○ Unexpired cost behavior patterns

_________________________ Least squares method

● This method uses the statistical
technique that analyzes relationship
Cost Estimation between independent and dependent
● A mixed cost contains both a variables
variable and a fixed component ● Under LSM, the regression line of
○ It does not remain constant best fit is found by predicting the the
with changes in activity nor a and b values in a straight-line
does it fluctuate on a per-unit formula using the actual activity and
basis in direct proportion to cost values from observations
changes in activity ● Regression line of best fit
● In estimating costs, accountants
typically assume that costs are linear
rather than curevilinear. Because of
this assumption, the general formula
for a straight line cane be used to
describe any tupe of cost within a
relevant range of activity
○ y = a + bX
○ y = total cost
○ a = fixed cost
○ b = variable cost
○ X = activity level

High-low method
● This method anaylzes a mixed cost
by first selecting the highest and
lowest levels of activity in a data set
if thse two points are within the
relevant range
● Activity levels are used because
activities cause costs to change, not
vice versa
Highest cost−Lowest Cost
b=
Highest activity level−Lowest Activity Level
March 3, 2023
● Cost behavior
Engagement proposal - sir will provide an ○ Fixed cost
example to us ○ Variable cost

Corporate tax income - variable

● Contribution margin income
Individual income tax - step cost
statement
Real property tax - variable
○ Used decision making
○ distinguish between fixed
Retainer engagement - fixed
expenses and variable
● Specific engagement however could
expenses
be variable
○ Contribution margin - profit
in excess of break even point
Marketing
● Variable - length of commercial, how
● Manufacturing cost - cost in relation
often the commercial will appear
to production
● Fixed -
● Period cost - administrative
proceedings
● If relevant range is not given, then
consider everything is within the
1. Equation/Contribution Margin
range
Method
2. Graphical method

● Variable cost ratio = VC / S

● Fixed cost ratio = FC / S
Management Accounting Income
● Contribution Margin Ration = CM / S
Statement
● ROS = Net / S
● Sales and variable are dependent on
the volume
● CVP Analysis assumptions
● Sales and variable costs are directly
○ Operates in elevant range
proportional
■ Must not be included
if extraordinary
Cost-Volume Profit Analysis
1. Behavior of total revenue is
linear
● 3 important concepts:
2. Expenses are categorized into
○ Target profit
2
○ Breakeven - cost = revenue
a. Fixed cost must be
○ Margin of safety - the range
fixed regardless of
that you can use before
activity level
reaching breakeven point
b. Unit variable cost
does not change
● Change in activity
c. Efficiency and
Effects on:
productivity of
○ Cost
workers does not
○ Revenue
change
○ Profit
 3. The sales mix remains ○ Can be used for
constant over the relevant benchmarking
range ○ Used to comeup with better
a. Sales mix - procedure
Distribution of
saleability of a Margin of Safety and Degree of Operating
product Leverage
4. The inventory levels at the
beginning and end of the Sensitivity Analysis
period are the same ● What will happen if there is a change
a. CGM: sold and unsold in one of the factors
b. CGS: only sold ● Margin of safety - answers the what if
c. CGM = CGS question if the budgeted revenues
5. SP, VC and FC are known or are above the breakeven point and
can be determined dropped. How far before the
breakeven point is reached?
Breakeven Anaylsis and Profit Targeting
● Sales = BES + MOS
● Breakeven point: the quantity of
output sold at which total revenue is ● If revenue falls by more than the
equals to the total cost margin of safe → loss
● Sales level, rev = costs
● 0 profit/ 0 loss ● Degree of Leverage or Operating
Leverage factor
● Loss | Profit ○ Factor
BEP ○ Imposed on the percentage
● BE = FC / CM change in volume
● Unit = UCM or CM/N ○ How much income will
● Amount = CMR change depending on the
change in the activity level
● VCR + CMR = 100% ● CM / NIBT
● CM / 1 - Tax Rate

● Profit targeting